10-K 1 a20171231-10k.htm 10-K Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
valirgbcroppeda14.jpg
VALIDUS HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
BERMUDA
001-33606
98-0501001
(State or other jurisdiction of incorporation or organization)
(Commission file number)
(I.R.S. Employer Identification No.)

29 Richmond Road, Pembroke, Bermuda HM 08
(Address of principal executive offices and zip code)
(441) 278-9000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Shares, $0.175 par value per share
 
New York Stock Exchange
5.875% Preferred Shares, Series A, $0.175 par value per share
 
New York Stock Exchange
5.800% Preferred Shares, Series B, $0.175 par value per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
 
 
 
Smaller reporting company
o
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2017 was $3,709.5 million computed upon the basis of the closing sales price of the Common Shares on June 30, 2017. For the purposes of this computation, shares held by directors and officers of the registrant have been excluded. Such exclusion is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the registrant.
As of February 27, 2018, there were 79,325,616 outstanding Common Shares, $0.175 par value per share, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information from certain portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the fiscal year ended December 31, 2017.
 


Table of Contents
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
        


This Annual Report on Form 10-K contains “Forward-Looking Statements” as defined in the Private Securities Litigation Reform Act of 1995. A non-exclusive list of the important factors that could cause actual results to differ materially from those in such Forward-Looking Statements is set forth under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Cautionary Note Regarding Forward-Looking Statements.”
PART I
Item 1.    Business
Overview
Validus Holdings, Ltd. was incorporated under the laws of Bermuda on October 19, 2005. Hereinafter, the “Company,” “us,” “we” or “Validus” are used to describe any or all of Validus Holdings, Ltd. and its subsidiary companies. The Company conducts its operations worldwide through three reportable segments which have been determined under accounting principles generally accepted in the United States of America (“U.S. GAAP”) segment reporting: Reinsurance, Insurance and Asset Management.
The Reinsurance segment operates globally and is primarily focused on treaty reinsurance. The Insurance segment operates globally and focuses on specialty insurance within both the Lloyd’s and the U.S. commercial insurance markets. The Asset Management segment reports the results of the Company’s Bermuda-based investment adviser, managing capital for third parties and Validus through insurance-linked securities (“ILS”) and other property catastrophe and specialty reinsurance investments.
We seek to establish ourselves as a leader in the global (re)insurance markets. Our principal operating objective is to use our capital efficiently by underwriting (re)insurance contracts with superior risk and return characteristics. Our primary underwriting objective is to construct a portfolio of (re)insurance contracts that maximizes our return on equity subject to prudent risk constraints on the amount of capital we expose to any single event. We manage our risks through a variety of means, including contract terms, portfolio selection, diversification, including geographic diversification, and proprietary and commercially available third-party vendor catastrophe models.
Since our formation in 2005, we have been able to achieve substantial success in the development of our business. Selected examples of our accomplishments are as follows:
•
Raising approximately $1.0 billion of initial equity capital in December 2005 and underwriting $217.4 million in gross premiums written for the January 2006 renewal season;
•
Building a risk analytics staff comprised of over 50 experts, many of whom have PhDs and Masters degrees in related fields;
•
Developing Validus Capital Allocation and Pricing System (“VCAPS”), a proprietary computer-based system for modeling, pricing, allocating capital and analyzing catastrophe-exposed risks;
•
Acquiring all of the outstanding shares of Talbot Holdings Ltd. (“Talbot”) on July 2, 2007;
•
Completing an initial public offering (“IPO”) on July 30, 2007;
•
Acquiring all of the outstanding shares of IPC Holdings Ltd. (“IPC”) on September 4, 2009;
•
Acquiring all of the outstanding shares of Flagstone Reinsurance Holdings, S.A. (“Flagstone”) on November 30, 2012;
•
Acquiring all of the outstanding shares of Western World Insurance Group, Inc. (“Western World”) on October 2, 2014;
•
Acquiring all of the outstanding shares of Crop Risk Services, Inc. (“CRS”) on May 1, 2017;
•
Successfully launching a series of sidecars and ILS funds beginning on May 25, 2011 and managing third party capital of $3.2 billion as at January 1, 2018;
•
Delivering a 10.4% compounded annual growth in book value per diluted common share plus accumulated dividends from formation through December 31, 2017;
•
Repurchasing approximately 81.0 million common shares for an aggregate purchase price of approximately $2.7 billion and paying an aggregate amount of $1.3 billion in common share dividends from formation through February 27, 2018.
•
Raising $400.0 million of additional equity capital through the issuance of preferred shares and paying an aggregate amount of $20.3 million in preferred dividends through February 27, 2018.



1

Merger Agreement
On January 21, 2018, the Company entered into a definitive agreement and plan of merger (the “Merger Agreement”) with American International Group, Inc. (“AIG”). The Merger Agreement provides that, subject to the satisfaction or waiver of certain conditions set forth therein, the Company will merge with an existing AIG subsidiary in accordance with the Bermuda Companies Act (the “Merger”), with the Company surviving the Merger as a wholly–owned subsidiary of AIG. For further details, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Overview” or Note 27 to the Consolidated Financial Statements, “Subsequent Events,” in Part II, Item 8.
Reportable Segments
In accordance with authoritative accounting guidance, we continually monitor and review our segment reporting structure to determine whether any changes have occurred that would impact the composition of our reportable segments. As a result of the evolution of the Company’s operations, the global nature of the (re)insurance industry and synergies obtained through the acquisition and integration of Talbot, Western World and CRS, the Company’s previous reportable segments had integrated in such a way that during the fourth quarter of 2017, the Company changed its reportable segments to “Reinsurance,” “Insurance,” and “Asset Management.” Furthermore, to better align the Company’s disclosures with its current strategy, the Company also changed its primary lines of business to “Property,” “Specialty - Short-tail” and “Specialty - Other.”
Detailed financial information about each of our reportable segments for each of the years in the three-year period ended December 31, 2017 is presented in Note 25 to the Consolidated Financial Statements, “Segment information,” in Part II, Item 8. The change in reportable segments and primary lines of business had no impact on our historical consolidated financial positions, results of operations or cash flows as previously reported. Where applicable, all prior periods presented have been reclassified to conform to this new presentation.
Reinsurance
The Reinsurance segment operates as a global provider of reinsurance products. The segment operates primarily through Validus Reinsurance, Ltd. (“Validus Re”) and Validus Reinsurance (Switzerland) Ltd. (“Validus Re Swiss”), as well as Lloyd’s Syndicate 1183 (the “Talbot Syndicate”), which is managed by Talbot Holdings Ltd. (“Talbot”) through its wholly–owned subsidiaries. The Talbot Syndicate has a short-tail treaty reinsurance portfolio that provides the Reinsurance segment with access to the Lloyd’s marketplace.
Validus Re is registered as a Class 4 insurer under The Insurance Act 1978 of Bermuda, amendments thereto and related regulations (the “Insurance Act”) since November 2005. It commenced operations with approximately $1.0 billion of equity capital and a balance sheet unencumbered by any historical losses relating to the 2005 hurricane season, the events of September 11, 2001, asbestos or other legacy exposures affecting our industry.
Validus Re Swiss is based in Zurich, Switzerland. Validus Re Swiss is licensed by the Swiss Financial Market Supervisory Authority (“FINMA”) in Switzerland. Validus Re Swiss is also licensed as a permit company in Bermuda under the Companies Act and is registered in Bermuda as a Class 4 insurer under the Insurance Act, operating through its Bermuda branch, which complements our Swiss-based underwriters with a separate Bermuda underwriting platform.
The Reinsurance segment primarily concentrates on property and other reinsurance risks commonly referred to as short-tail in nature due to the relatively brief period between the occurrence and payment of a claim.
The following are the primary lines in which the Reinsurance segment conducts its business. Details of gross premiums written by line of business are provided below:
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
(Dollars in thousands)
 
Gross
Premiums
Written
 
% of Total
 
Gross
Premiums
Written
 
% of Total
 
Gross
Premiums
Written
 
% of Total
Property
 
$
548,977

 
45.9
%
 
$
497,263

 
42.0
%
 
$
571,612

 
47.9
%
Specialty - Short-tail
 
505,111

 
42.3
%
 
555,504

 
46.9
%
 
599,333

 
50.1
%
Specialty - Other
 
141,119

 
11.8
%
 
132,145

 
11.1
%
 
23,644

 
2.0
%
Total
 
$
1,195,207

 
100.0
%
 
$
1,184,912

 
100.0
%
 
$
1,194,589

 
100.0
%
Property:    The Reinsurance segment primarily underwrites property reinsurance business on a catastrophe excess of loss, per risk excess of loss and proportional basis.
Property catastrophe excess of loss:  Property catastrophe reinsurance covers insurance companies’ (referred to as “ceding companies” or “cedants”) exposures to an accumulation of property and related losses from separate policies, typically relating to

2

natural disasters or other catastrophic events. Property catastrophe reinsurance is generally written on an excess of loss basis, which responds when aggregate claims and claim expenses from a single occurrence for a covered peril exceed a certain amount specified in a particular contract. Under these contracts, the Company provides protection to an insurer for a portion of the total losses in excess of a specified loss amount, normally up to a maximum amount per loss and/or an aggregate amount across multiple losses, as specified in the contract. In the event of a loss, most contracts provide for coverage of a second occurrence following the payment of a premium to reinstate the coverage under the contract, which is referred to as a reinstatement premium. The coverage provided under excess of loss reinsurance contracts may be on a worldwide basis or limited in scope to specific regions or geographical areas. Property catastrophe reinsurance contracts are typically written on an “all perils” basis, providing protection against losses from earthquakes and hurricanes, as well as other natural and man-made catastrophes such as floods, tornadoes, fires and storms. Coverages may also be written to provide limited coverage based on named perils only, such as windstorm-only coverage. The predominant exposures covered are losses stemming from property damage and business interruption coverage resulting from a covered peril. Certain risks, such as terrorism, cyber crime, war or nuclear contamination may be excluded, partially or wholly, from certain contracts. Gross premiums written on property catastrophe excess of loss business during the year ended December 31, 2017 were $432.5 million.
Property per risk excess of loss:  Property per risk reinsurance provides coverage for ceding companies’ excess retention on individual property and related risks, such as highly-valued buildings. Per risk reinsurance protects cedants on a “single risk” basis. A “risk” in this context might relate to one building, or a group of buildings, or to one insurance policy which the cedant treats as a single risk. Coverage is usually triggered by a large loss sustained by an individual risk rather than by smaller losses which fall below the specified retention of the reinsurance contract. Such property per risk coverages are generally written on an excess of loss basis, which provides the reinsured with protection beyond a specified amount up to the limit set within the reinsurance contract. Gross premiums written on property per risk excess of loss business during the year ended December 31, 2017 were $26.0 million.
Property proportional:    Property proportional contracts require that the reinsurer share the premiums as well as the losses and loss expenses in an agreed proportion with the reinsured. Gross premiums written on property proportional business during the year ended December 31, 2017 were $90.5 million.
Specialty - Short-tail:    This line consists of reinsurance on aerospace and aviation, agriculture, composite, marine, other specialty (composed of contingency, crisis management and life and accident & health), technical lines, terrorism, trade credit, and workers’ compensation. The Company seeks to underwrite specialty lines with very limited exposure correlation with its property portfolios. With the exception of the aerospace and aviation, agriculture, marine, and trade credit lines of business, which have a meaningful portion of their gross premiums written volume on a proportional or treaty basis, the Company’s specialty - short-tail lines are written on an excess of loss basis. Gross premiums written on specialty - short-tail business during the year ended December 31, 2017 were $505.1 million.
Specialty - Other:    This class provides reinsurance on casualty and financial lines of business on both a proportional and excess of loss basis. Gross premiums written on specialty - other business during the year ended December 31, 2017 were $141.1 million.
Insurance
The Insurance segment focuses on property and specialty insurance business, as well as facultative reinsurance, which provides coverage on a single-risk basis. The Company has built its insurance platform strategically over time to give it the required flexibility to leverage operational strengths in a number of markets and the necessary tools to effectively manage (re)insurance cycles. The segment operates through two insurance companies, the Talbot Syndicate and Western World.
Talbot provides the Company access to the Lloyd’s marketplace and primarily writes short-tail lines of business. As a London-based insurer, the Talbot Syndicate writes the majority of its premiums on risks outside of the United States. Talbot’s underwriting team is made up of niche underwriting expertise. The Company has expanded and diversified its business through wholly–owned subsidiaries acting as approved Lloyd’s coverholders for the Talbot Syndicate: Talbot Underwriting Risk Services, Ltd. (London), Validus Specialty Underwriting Services, Inc. (New York) (“Validus Specialty”), Talbot Underwriting (MENA) Ltd. (Dubai), Validus Reaseguros, Inc. (Miami), Talbot Underwriting (LATAM) S.A. (Chile) and Talbot Risk Services Pte. Ltd. (Singapore and Australia).
Western World provides the Company access to the U.S. commercial insurance market and primarily insures small to medium size commercial and institutional risks covering general liability, professional liability, product liability, miscellaneous malpractice and property through three wholly–owned insurance subsidiaries: Western World Insurance Company (“WWIC”), Tudor Insurance Company (“Tudor”) and Stratford Insurance Company (“Stratford”) all domiciled in New Hampshire. WWIC operates as a surplus lines insurer in all U.S. jurisdictions other than New Hampshire. Tudor is licensed as a domestic surplus lines insurer in New Hampshire and is authorized to conduct business as a surplus lines insurer in all other U.S. jurisdictions. Stratford is an admitted insurer in 50 U.S. jurisdictions.
On May 1, 2017, Western World acquired all of the outstanding capital stock of CRS, a U.S. based primary crop insurance managing general agent, with Stratford acting as the approved insurance provider. The acquisition further diversified the Insurance segment and added a substantial amount of gross written premium to Western World.

3

Within the U.S. we also operate our Validus Specialty platform, which provides our clients access to the entire Validus Group insurance platform. Validus Specialty leverages the underwriting expertise, risk appetite and balance sheets of both Talbot and Western World, which enables us to provide more streamlined service to our U.S. clients and brokers, as well as more choice and capacity.
The following are the primary lines in which the Insurance segment conducts its business. Details of gross premiums written by line of business are provided below:
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
(Dollars in thousands)
 
Gross
Premiums
Written
 
% of Total
 
Gross
Premiums
Written
 
% of Total
 
Gross
Premiums
Written
 
% of Total
Property
 
$
397,292

 
27.3
%
 
$
371,221

 
31.1
%
 
$
334,370

 
28.1
%
Specialty - Short-tail
 
580,952

 
40.0
%
 
397,602

 
33.3
%
 
440,735

 
37.0
%
Specialty - Other
 
474,889

 
32.7
%
 
425,314

 
35.6
%
 
416,094

 
34.9
%
Total
 
$
1,453,133

 
100.0
%
 
$
1,194,137

 
100.0
%
 
$
1,191,199

 
100.0
%
Property:    The main classes underwritten within the property lines are International and North American direct and facultative contracts, lineslips and binding authorities. The business written is mostly commercial and industrial insurance. Coverage provided includes all risks of direct physical loss or damage, business interruption and natural catastrophe perils. Property also includes downstream energy and construction business. Within the downstream energy class, covered occupancies include oil, gas, petrochemicals, chemical, power generation and utilities and process industries. Coverage is typically all perils and includes machinery breakdown and business interruption where required. The primary focus within the construction class is on major capital projects, placed on a direct or facultative basis, including on a binding authority basis through a coverholder. Our insurance operations also underwrite building, business personal property, business income (with or without extra expense) and homeowners coverages, including catastrophe, for small to medium size U.S. commercial habitational, industrial, service, and mercantile risks. Gross premiums written on property business during the year ended December 31, 2017 were $397.3 million.
Specialty - Short-tail: This class consists of accident and health, agriculture, aviation, contingency, marine and political lines (composed of war and political violence). With the exception of agriculture business which is written through agents or brokers, most of the business within the specialty - short-tail lines is written on a direct or facultative basis, including on a binding authority basis through a coverholder. Gross premiums written on specialty - short-tail business during the year ended December 31, 2017 were $581.0 million.
Accident and Health:    The accident and health class covers insurable interests relating to the death or disability of employees or those under contract. Gross premiums written on accident and health business during the year ended December 31, 2017 were $20.1 million.
Agriculture: The agriculture class primarily provides U.S. multi-peril crop insurance (“MPCI”) and private crop insurance products written through and in relation to CRS. Gross premiums written on agriculture business during the year ended December 31, 2017 were $225.8 million.
Aviation:    The aviation class insures major airlines and general aviation. Gross premiums written on aviation business during the year ended December 31, 2017 were $24.3 million.
Contingency:    The main types of covers written under the contingency class are event cancellation, non-appearance and prize indemnity business. Gross premiums written on contingency business during the year ended December 31, 2017 were $26.3 million.
Marine:    The main types of business within the marine class are hull, cargo and upstream energy. Hull consists primarily of ocean going vessels and covers worldwide risks on an all perils or total loss only basis together with yachts. Cargo consists of worldwide transits with a particular emphasis on oil cargo, project cargo, pre-launch satellite and space risks, specie, fine art and high value motor vehicles. Upstream energy covers a variety of oil and gas industry exploration and production risks. Gross premiums written on marine business during the year ended December 31, 2017 were $171.3 million.
Political Lines:    The political lines class covers risks associated with political violence and war, including physical damage to aircraft and marine vessels as well as other property losses. Gross premiums written on political lines business during the year ended December 31, 2017 were $113.2 million.
Specialty - Other:    Specialty - other lines consist of financial, liability, marine and energy liability, political risk, and products and airports. With the exception of liability business which is primarily written through agents or brokers in the U.S., most of the business within the specialty - other class is written on a direct or facultative basis, including on a binding authority basis through a coverholder. Gross premiums written on specialty - other business during the year ended December 31, 2017 were $474.9 million.

4

Financial:    The financial lines class underwrites bankers blanket bond, commercial crime, computer crime, cyber crime, professional indemnity, directors’ and officers’ coverage as well as errors and omissions liability for various types of financial institutions and other companies. Bankers blanket bond and commercial crime insurance products are specifically designed to protect against direct financial loss caused by fraud/criminal actions and to mitigate the damage such activities may have on the asset base of the insured. Computer crime insurance protects against the misappropriation of funds and assets via the insured’s computer system. Professional indemnity insurance protects businesses in the event that legal action is taken against them by third parties claiming a breach of professional duty. Directors’ and officers’ insurance protects the personal liability of directors and officers or policyholder costs for indemnification arising out of an alleged breach of a fiduciary duty. Gross premiums written on financial lines business for the year ended December 31, 2017 were $69.5 million.
Liability:    The liability classes primarily underwrite U.S. general liability, professional liability, product liability, and miscellaneous malpractice occurrence-based coverage for contractors, dwellings, manufacturers, and other businesses. Gross premiums written on liability lines during the year ended December 31, 2017 were $252.8 million.
Marine and Energy Liability:    The marine and energy liability class provides cover for protection and indemnity clubs and a wide range of companies operating in the marine and energy sectors. Gross premiums written on marine and energy liability business during the year ended December 31, 2017 were $55.5 million.
Political Risk:    The political risk class primarily provides cover for expropriation, contract frustration/trade credit, kidnap and ransom and malicious and accidental product tamper. The period of the risks can extend up to 36 months and beyond. Gross premiums written on political risk business during the year ended December 31, 2017 were $82.3 million.
Products and Airports: The products and airports class primarily covers the repair, maintenance and upkeep of aircrafts and premises for small companies. Gross premiums written on products and airports business during the year ended December 31, 2017 were $14.7 million.
Asset Management
The Asset Management segment is a core element of the Company’s strategy to expand in capital markets by participating in the market for ILS. ILS are financial instruments, the values of which are determined by insurance losses caused primarily by natural catastrophes such as major earthquakes and hurricanes. As such, the returns on ILS are generally uncorrelated with the overall financial markets, making ILS an attractive asset class for investors. The Asset Management segment leverages the Company’s extensive business sourcing, underwriting, research and analytic capabilities to construct ILS portfolios subject to prudent risk constraints.
The Asset Management segment primarily operates through AlphaCat Managers Ltd. (“AlphaCat Managers”), an asset manager primarily for third party investors. However, Validus Re also has direct investments in certain funds and sidecars which are also managed by AlphaCat Managers. As an asset manager, AlphaCat Managers’ primary sources of income are management and performance fees.
AlphaCat investors access this uncorrelated asset class through various AlphaCat funds and sidecars that participate in the market via (i) AlphaCat Reinsurance Ltd. (“AlphaCat Re”), a Bermuda provider of fully collateralized property catastrophe and specialty reinsurance and retrocession capacity and (ii) AlphaCat Master Fund Ltd. (“AlphaCat Master Fund”), a Bermuda investment fund investing in reinsurance related capital markets transactions (collectively the “Master Funds”). AlphaCat Re also enters into transactions on behalf of third party investors on a direct basis whereby all of the risks and rewards of the underlying transactions are transferred to the investors using notes payable to those investors. Furthermore, certain of the funds and direct third party investors purchase catastrophe bonds (“cat bonds”) directly under instruction from AlphaCat Managers.
BetaCat investors access the market through the BetaCat funds that participate in the market via BetaCat Fund Ltd., a Bermuda investment fund exclusively investing in cat bonds. Cat bonds purchased by the BetaCat funds are principal-at-risk variable rate notes and other event-linked securities focused on property and casualty risks and issued under Rule 144A of the Securities Act of 1933, as amended, following a passive buy-and-hold investment strategy.
The Company is considered to be the primary beneficiary of the AlphaCat Master Funds, the AlphaCat sidecars, and certain AlphaCat and BetaCat ILS funds and therefore the Company consolidates these entities in its financial statements. For further details, refer to Notes 2 and 9 to the Consolidated Financial Statements, “Basis of preparation and consolidation,” and “Variable interest entities,” respectively, in Part II, Item 8.

5

The following are the primary financial indicators for the Asset Management segment:
Assets under management (“AUM”): AUM represents total assets managed by AlphaCat Managers on behalf of third party and related party investors. AUM includes the assets of the AlphaCat sidecars, the AlphaCat ILS funds, the BetaCat ILS funds and direct third-party investors. AUM as at January 1, 2018 and 2017 were as follows:
 
 
Assets Under Management
 
 
January 1,
(Dollars in thousands)
 
2018
 
2017
Third party
 
$
3,224,171

 
$
2,498,597

Related party
 
174,733

 
242,715

Total
 
$
3,398,904

 
$
2,741,312

Fee revenues: Fee revenues represent management and performance fees earned on third party and related party AUM. Fee revenues for the years ended December 31, 2017, 2016 and 2015 were as follows:
 
 
Fee revenues
 
 
Years Ended December 31,
(Dollars in thousands)
 
2017
 
2016
 
2015
Third party
 
$
20,349

 
$
18,771

 
19,661

Related party
 
2,150

 
3,329

 
5,309

Total
 
$
22,499

 
$
22,100

 
$
24,970

Investment (loss) income from funds and sidecars: Investment (loss) income from funds and sidecars represents the Company’s proportional share of losses or income earned by the various AlphaCat funds and sidecars and BetaCat funds. Investment (loss) income from funds and sidecars for the years ended December 31, 2017, 2016 and 2015 was as follows:
 
 
Investment (loss) income from funds and sidecars (a)
 
 
Years Ended December 31,
(Dollars in thousands)
 
2017
 
2016
 
2015
Investment (loss) income from funds and sidecars
 
$
(25,149
)
 
20,579

 
$
19,176

(a)
The investment income from the funds and sidecars is presented on an equity accounting basis.
Gross premiums written: Gross premiums written represent premiums written by AlphaCat Re on behalf of the AlphaCat funds and sidecars and direct third-party investors. Gross premiums written for the years ended December 31, 2017, 2016 and 2015 were as follows:
 
 
Gross Premiums Written
 
 
Years Ended December 31,
(Dollars in thousands)
 
2017
 
2016
 
2015
Gross premiums written
 
$
312,819

 
$
270,402

 
$
176,126

Enterprise Risk Management
Risk Management Framework: The Company promotes sound risk management practices at all levels of the organization, and has implemented an Enterprise Risk Management (“ERM”) framework (the “Framework”) that is aligned with the Company’s culture and responds to the needs of the business. The Framework establishes, identifies, assesses, quantifies and manages risks and opportunities. The Framework is designed to:
•
Establish the principles by which the Company can evaluate the risk/reward trade-offs associated with key strategic and tactical decisions.
•
Establish a risk governance structure that, in respect of all activities related to ERM, operates with clearly defined roles and responsibilities.
•
Establish minimum requirements that must be met by each of the Company’s reportable segments.
•
Identify and assess all risks and causes of risks arising out of the Company’s strategic initiatives, internal processes and external environment.
•
Establish a set of responses to manage the Company’s risks within its stated risk appetite and risk tolerances.

6

•
Establish procedures through which near-miss and actual incidents, that either have the potential to impact or have impacted the Company, are reported and reviewed in order to inform the risk identification and assessment process.
Risk Governance: Our risk governance philosophy reflects the overall governance of the Company, with the segments given broad autonomy over the management of their businesses, while adhering to the overall strategy of the Company. Similarly, the Company’s reportable segments have broad operational latitude over their risk management functions while staying within the parameters set by the Company.
The Company’s Board of Directors has established a separate Risk Committee (“RC”) that is governed by a charter which is updated and reviewed periodically by the Board of Directors. The RC is responsible for, among other things, approving the Framework, working with management to ensure ongoing, effective implementation of the Framework and reviewing the Company’s specific risk limits as defined in the Framework, including limits related to major categories of risk. The implementation of risk policies and oversight of risk management is the responsibility of the Group Risk Management Committee (“GRMC”). The GRMC reports to the RC and is governed by a charter that is reviewed and approved annually by the RC. The GRMC also has two subcommittees, the Model Risk Subcommittee and the Operational Risk Subcommittee, both of which are governed by charters that are reviewed annually by the RC. Various risk policies are in place to facilitate consistent risk assessment across the Company and to ensure that strategic business decisions are supported by effective modeling and analysis.
Risk Appetite: The Company’s risk appetite is expressed through a series of qualitative and quantitative statements, principles, limits, and tolerances that, in the aggregate, convey the Company’s risk and reward preferences and set the risk parameters within which the Company and its segments operate. The risk appetite is proposed by management and approved by the Board of Directors.
The significant quantitative measures include meeting minimum returns on capital and risk-adjusted capital over a full insurance industry cycle, managing the probability of break-even net income or better, meeting or exceeding budgeted net income over a calendar year, and managing the probability of losing specified percentages of shareholders’ equity in a calendar year. They also include probability thresholds in respect of maintaining a buffer above regulatory and rating agency capital levels.
The Company also sets levels of concentration risks within its risk appetite, including those related to probable maximum losses, zonal aggregates and the contribution of various risk categories to the overall assessment of the Company’s risk capital.
Risk Classification: Risks are broadly divided into those that the Company assumes explicitly and from which it derives income and those that are a by-product of the operating and business environment, from which the Company does not earn income.
The risks assumed are categorized as catastrophe, reserve and premium risks (also together referred to as insurance risk), market (or investment) risk and credit risk. The Company’s goal is to get adequately compensated for these risks, while creating optimal insurance and investment portfolios subject to the constraints of the Company’s risk appetite. The remaining risks are categorized as operational and strategic risks, which typically include emerging risks, for which the Company’s goal is to identify, assess and mitigate to the extent considered appropriate.
Risk Ownership: The Company’s risk management philosophy is to entrust risk identification and control activities with the employees who have the responsibility for and expertise in the areas giving rise to each risk. This approach not only creates workflow efficiencies, it also promotes awareness of and accountability for risk at all levels of the Company. As such, primary risk ownership is assigned to the managers of functional areas. The risk identification and control activities are embedded in the job descriptions of risk owners and control operators and monitored by the GRMC.
Risk Assessment, Control and Mitigation: The Company performs a regular risk assessment process that considers the likelihood and impact of causes of risk, both before and after the existence of relevant controls. The approaches used to identify and update causes of risk include scenario building, incident and near-miss reporting and market intelligence. We have established controls to appropriately manage the likelihood and impact of risks, focused on those with the most significance and after considering the tolerance level established for each risk. We may also design new controls in response to the incident reporting process.
The Company also has in place policies, including underwriting, investment, and credit policies, to manage the assumption of risk. These policies provide for the Company’s risk limits, tolerance levels and other guidelines, as well as the processes for ensuring compliance with the desired risk profile of the Company. The Company has at its disposal a variety of risk mitigation tools, including the purchase of reinsurance and retrocessional coverage, which it uses to ensure that its risk profile stays within prescribed limits and tolerance levels.
Exposure Management: In order to manage the assumption of insurance risk, the Company has established risk limits through both qualitative and quantitative considerations, including market share, history of and expertise in a class of business or jurisdiction, transparency and symmetry of available information, reliability of pricing models and availability and cost of reinsurance. These limits are reviewed at least annually and aligned to the overall risk appetite established by the Company’s Board of Directors. In addition, a group exposure management policy is in place to ensure appropriate and consistent risk assessment and aggregation of exposures that accumulate between the operating companies in the group.

7

Three tools are used to measure and manage exposures:
•
Absolute maximum limits - these are defined based on the underlying peril or coverage and include measures such as zonal aggregates, which convey the maximum contractual loss exposure.
•
Probable maximum loss - these are defined where probabilistic event sets exist for underlying perils and are established for most natural catastrophe, aviation and upstream energy coverage, and convey an extreme but likely loss exposure.
•
Realistic disaster scenarios (“RDSs”) - these are either prescribed by third parties or developed internally and convey a more intuitive view of potential loss outcomes.
The Company will often use multiple tools to validate its exposure measurement and ensures that at least one of these tools is available for each class of business.
Model Validation Framework: The Company relies extensively on a wide range of models to support key decisions made across the business, and has implemented a Model Validation Framework to establish a uniform set of validation and governance standards that ensure the quality and reliability of key models across the Company.
Portfolio Optimization: The Company has developed a comprehensive and integrated Economic Capital Model (“ECM”) framework to facilitate the consistent assessment of risk, including risks classified as operational. This framework includes assessment at the individual operating company level, as well as across the Company. Using the ECM framework, the Company is able to assess the impact on risk appetite metrics of key strategic and tactical decisions as well as the risk/return trade-offs associated with these decisions, including growth strategy, new product launch, business mix and retrocession strategy, mergers and acquisitions, planning and budgeting, investment strategy and capital management.
It is the goal of the Company to make the most efficient use of its capital and to achieve an adequate return for its shareholders. To that end, the Company seeks to maximize net income given the amount of capital at risk and subject to the risk limits, tolerance levels and other constraints that are imposed by our business, regulatory, and rating agency environments. The Company has therefore put in place portfolio optimization procedures, including the integrated use of the ECM within the annual planning process, in order to help shape portfolios that optimize their respective risk return profiles.
Underwriting Risk Management
The Company’s underwriters manage risk by monitoring a number of qualitative and quantitative indicators. Our in-house pricing platform, VCAPS, provides reinsurance underwriters with a real-time view of the risk-adjusted profitability of each account. This tool allows our underwriters to examine the effects of contract terms and conditions as well as analyze the contribution of a contract to our overall risk capital and its impact on the projected incurred loss for one of our key stress scenarios. The Company’s insurance operations also use sophisticated pricing platforms including a suite of pricing models for the direct and facultative underwriting teams. These models include VCAPS and other proprietary models, including the use of proprietary and vendor-developed rating tools through the Western World Integrated Platform (“WWIP”), as well as models licensed from third parties. The Company believes that giving our underwriters the tools to make sound decisions is critical to our long-term success. To that end, we strive to create an environment that promotes close cooperation between our underwriting, catastrophe modeling, risk, claims, and actuarial functions.
All of the Company’s underwriters adhere to a strict set of underwriting guidelines and letters of authority that specifically address the limits of their underwriting authority and their referral criteria.
The Company’s current underwriting guidelines and letters of authority include:
•
Lines of business that a particular underwriter is authorized to write;
•
Exposure limits by line of business;
•
Contractual exposures and limits requiring mandatory referrals; and
•
Levels of analysis to be performed by lines of business.
In general, our underwriting approach is to:
•
Seek high quality clients who have demonstrated superior performance over an extended period;
•
Evaluate our clients’ exposures and make adjustments where their exposure is not adequately reflected;
•
Apply the comprehensive knowledge and experience of our entire underwriting team to make progressive and cohesive decisions about the business they underwrite; and
•
Employ our well-founded and carefully maintained market contacts within the Company to enhance our robust distribution capabilities.

8

Our underwriters have the responsibility to analyze all submissions and determine if the related potential exposures meet with both the Company’s risk profile line size and aggregate limitations, in line with the business plan. In order to ensure compliance, we run appropriate management information reports and subject all lines to regular audits.
All of the companies managed by AlphaCat Managers are subject to investment or underwriting guidelines. These guidelines are established in the offering documentation of each company managed by AlphaCat Managers. AlphaCat Managers manages investment portfolios in accordance with guidelines, which are subject to oversight by the respective company’s board of directors. AlphaCat Managers leverages the Company’s underwriting and analytical resources; however, all investment and underwriting decisions are ultimately made by AlphaCat Managers. When services are provided to AlphaCat Managers by the Company’s underwriting teams, the relevant underwriting risk management framework outlined in this section applies.
Use of Models
A pivotal factor in determining whether to found and fund the Company was the opportunity for differentiation based upon superior risk management expertise; specifically, managing catastrophe risk and optimizing our portfolio to generate attractive returns on capital while controlling our exposure to risk, and assembling a management team with the experience and expertise to do so. The Company’s proprietary models are updated to reflect the latest science and data for the given peril-region of interest. This has enabled the Company to gain a competitive advantage over those reinsurers who rely exclusively on commercial models for pricing and portfolio management. The Company has made a significant investment in expertise in the risk modeling area to capitalize on this opportunity. The Company has assembled an experienced group of professional experts with a wide range of advanced degrees in the physical sciences/mathematics who are operating in an environment designed to enable them to use their expertise as a competitive advantage. While the Company uses both proprietary and commercial probabilistic models, catastrophe risk is ultimately subject to absolute aggregate limitations as discussed above.
Commercial Vendor Models: The Company licenses major commercial vendor models, including RMS and AIR, to assess the adequacy of risk pricing and to monitor its overall exposure to risk in correlated geographic zones for various natural catastrophe perils. The vendor models provide information that enables the Company to aggregate exposures by correlated event loss scenarios, which are probability-weighted. This enables the generation of exceedance probability curves for the portfolio and major geographic areas. All models have their strengths and weaknesses; our internal research efforts target a greater understanding of, and if necessary, changes to frequency and severity for key peril-regions.
The Company also uses its quantitative expertise to improve the reliability of the vendor model outputs and expedite scientific review and operationalization of their findings to formulate its view of risk in the following areas:
•
Ceding companies may report insufficient data and many reinsurers may not be sufficiently critical in their analysis of this data. The Company generally scrutinizes data for anomalies that may indicate insufficient data quality. These circumstances are addressed by either declining the program or, if the variances are manageable, by modifying the model inputs and outputs, and ultimately, pricing to reflect insufficient data quality;
•
Performing independent checks on the accuracy of reported building characteristics through third-party tools and the use of licensed data sources;
•
Prior to making overall adjustments for changes in variable metrics, the Company carefully examines the adjustment against the latest scientific studies and technology available to ensure its impact to the business is thoroughly evaluated before adopting it into its systems; and
•
To properly quantify risk, the Company frequently adjusts vendor models in advance of their updates based on the latest scientific studies and claims data from recent events.
In addition, many risks, such as second-event covers, aggregate excess of loss, or attritional loss components, cannot be fully evaluated using the vendor models. In order to better evaluate and price these risks, the Company has developed proprietary analytical tools, such as VCAPS and other models and data sets.
Proprietary Models: In addition to making frequency and severity adjustments to the vendor model outputs, the Company utilizes VCAPS to assist in pricing submissions and monitoring risk aggregation.
VCAPS uses the output of catastrophe models to generate a 100,000-year simulation set, which is used for both pricing and risk management. This approach allows more precise measurement and pricing of risk given the underlying exposures. The two primary benefits of this approach are:
•
VCAPS takes into account annual limits, event/franchise/annual aggregate deductibles, and reinstatement premiums. This functionality allows for more accurate evaluation of treaties with a broad range of features, including both common (reinstatement premium and annual limits) and complex features (second or third event coverage, aggregate excess of loss, attritional loss components, covers with varying attachment across different geographical zones or lines of businesses and covers with complicated structures); and

9

•
VCAPS’s use of 100,000-year simulations enables robust pricing of catastrophe-exposed business. This capability is possible in real-time operation because the Company has designed a computing hardware platform and software environment to accommodate the significant computing needs.
In addition to VCAPS, the Company uses other proprietary models and other data in evaluating exposures.
Geographic Diversification
The Company actively manages its aggregate exposures by geographic or risk zone to maintain a balanced and diverse portfolio of underlying risks. The coverage the Company is willing to provide for any risk located in a particular zone is limited to a predetermined level, thus limiting the net aggregate loss exposure from all contracts covering risks believed to be located in any zone. Contracts that have “worldwide” territorial limits have exposures in several geographic zones. Generally, if a proposed contract would cause the limit to be exceeded, the contract would be declined, regardless of its desirability, unless the Company buys reinsurance or retrocessional coverage, thereby reducing the net aggregate exposure to the maximum limit permitted or less.
For further details on gross premiums written allocated by the territory of coverage exposure refer to Note 25 to the Consolidated Financial Statements, “Segment Information,” in Part II, Item 8.
The effectiveness of geographic zone limits in managing risk exposure depends on the degree to which an actual event is confined to the zone in question and on the Company’s ability to determine the actual location of the risks believed to be covered under a particular insurance or reinsurance contract. Accordingly, there can be no assurance that risk exposure in any particular zone will not exceed that zone’s limits. Further control over diversification is achieved through guidelines covering the types and amount of business written in product classes and lines within a class.
Reinsurance Management
The Company enters into reinsurance and retrocession agreements in order to mitigate its accumulation of loss, reduce its liability on individual risks and enable it to underwrite policies with higher limits. The ceding of the (re)insurance risk does not legally discharge the Company from its primary liability for the full amount of the policies, and the Company is therefore required to pay the loss and bear collection risk relating to the possibility that the reinsurer or retrocessionaire fails to meet its obligations under the reinsurance or retrocession agreement.
Retrocession:  The Company monitors the opportunity to purchase retrocessional coverage for its reinsurance segment on a continual basis and employs the VCAPS modeling system to evaluate the effectiveness of risk mitigation and exposure management relative to the cost. This coverage may be purchased on an indemnity basis as well as on an index basis (e.g., industry loss warranties (“ILWs”)). The Company also considers and at times uses alternative retrocessional structures, including collateralized quota share facilities and other capital markets products (e.g. catastrophe bonds), where the pricing and terms are attractive.
When the Company buys retrocessional coverage on an indemnity basis, payment is for an agreed upon portion of the losses actually suffered. In contrast, when the Company buys an ILW cover, which is a reinsurance contract in which the payout is dependent on both the insured loss of the policy purchaser and a measure of the industry-wide loss, payment is made only if both the Company and the industry suffer a loss, as reported by one of a number of independent agencies, in excess of specified threshold amounts. With an ILW, the Company bears the risk of suffering a loss while receiving no payment under the ILW if the industry loss was less than the specified threshold amount.
Ceded Reinsurance: In the Insurance segment, the reinsurance program is reviewed by the reinsurance purchasing team on an on-going basis in line with the main business planning process. This process incorporates advice and analytical work from our brokers, actuarial and capital modeling teams.
The review and any subsequent modification to the program is based upon the following:
•
budgeted underwriting activity for the coming year;
•
loss experience from prior years;
•
loss information from the coming year’s individual capital assessment calculations;
•
expected changes to risk limits and aggregation limits and any other changes to the Company’s risk tolerance;
•
scenario planning;
•
changes to capital requirements; and
•
RDSs prescribed by Lloyd’s.
The Company purchases reinsurance on both a losses occurring basis as well as excess of loss coverage on risk attaching basis where the timing of the loss event is less easily verified or where such cover is available. The Company utilizes reinsurance to reduce earnings volatility, to protect capital and to limit its exposure to risk concentration.

10

The type, quantity and cost of cover of the proposed reinsurance program is reviewed by the Global Head of Insurance, and ultimately authorized by the respective boards of each operating entity. Slips are developed prior to inception to ensure that optimum cover is achieved. After purchase, cover notes are reviewed by the relevant class underwriters and presentations are made to all underwriting staff to ensure they are aware of the boundaries of the cover.
Distribution
Although we conduct some business on a direct basis with our treaty and facultative reinsurance clients, most of our business is derived through (re)insurance intermediaries (“brokers”), who access business from clients and coverholders. We are able to attract business through our recognized lead capability in most classes we underwrite, particularly in classes where such lead capability is rare.
Currently, our largest broker relationships, as measured by gross premiums written, are with Marsh & McLennan Companies, Inc., Aon Benfield Group Ltd. and Willis Towers Watson plc. The following table sets forth the Company’s gross premiums written by broker:
 
 
Gross Premiums Written
 
 
Year Ended December 31, 2017
(Dollars in thousands)
 
Reinsurance Segment
 
Insurance Segment
 
Asset Management Segment
 
Eliminations
 
Total
 
% of Total
Name of Broker
 
 
 
 
 
 
 
 
 
 
 
 
Marsh & McLennan Companies, Inc.
 
$
462,816

 
$
157,862

 
$
110,546

 
$
(4,049
)
 
$
727,175

 
24.6
%
Aon Benfield Group Ltd.
 
297,581

 
98,361

 
86,509

 
—

 
482,451

 
16.3
%
Willis Towers Watson plc
 
176,738

 
94,525

 
86,169

 
—

 
357,432

 
12.1
%
Sub-total
 
937,135

 
350,748

 
283,224

 
(4,049
)
 
1,567,058

 
53.0
%
All Others/Direct
 
258,072

 
1,102,385

 
29,595

 
(6,172
)
 
1,383,880

 
47.0
%
Total
 
$
1,195,207

 
$
1,453,133

 
$
312,819

 
$
(10,221
)
 
$
2,950,938

 
100.0
%
Reserve for Losses and Loss Expenses
For (re)insurance companies, a significant judgment made by management is the estimation of the reserve for losses and loss expenses. The Company establishes its reserve for losses and loss expenses to cover the estimated incurred liability for both reported and unreported claims.
Loss reserves are established due to the significant periods of time that may lapse between the occurrence, reporting and payment of a loss. To recognize liabilities for unpaid losses and loss expenses, the Company estimates future amounts needed to pay claims and related expenses with respect to insured events. The Company’s reserving practices and the establishment of any particular reserve reflects management’s judgment concerning sound financial practice and does not represent any admission of liability with respect to any claim. Unpaid losses and loss expense reserves are established for reported claims (“case reserves”) and incurred but not reported (“IBNR”) claims. For information regarding the Company’s unpaid losses and loss expense reserves on both a gross and net basis see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Loss Reserves.”
The nature of the Company’s high excess of loss and catastrophe business can result in loss expenses and payments that are both irregular and significant. Such losses are part of the normal course of business for the Company. Adjustments to reserves for individual years can also be irregular and significant. Conditions and trends that have affected development of liabilities in the past may not necessarily occur in the future. Accordingly, it is inappropriate to extrapolate future redundancies or deficiencies based upon historical experience. See Part I, Item 1A, “Risk Factors,” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Cautionary Note Regarding Forward-Looking Statements.”
Investment Management
The overriding goal of our investment management is capital preservation, such that the assets of the Company are invested to provide for the timely payment of all contractual obligations of policyholders and creditors, ensuring our ability to underwrite future business and to satisfy all regulatory and rating agency requirements. We aim to achieve these objectives through a clearly defined process that is driven by the enterprise-wide risk and capital position of the Company to ensure assets are invested in accordance with our defined financial objectives and risk tolerances. Our approach considers the joint impact of underwriting and investment risks to the Company, in the context of clear prioritization of underwriting needs and opportunities. As such, we structure our investment portfolio to support policyholder reserves and contingent risk exposures with a liquid portfolio of high quality fixed-income investments with a comparable duration profile.

11

Our Chief Investment Officer and Chief Financial Officer oversee our investment strategy and have established the Company's Investment Policy Statement ("IPS") which is approved by our Finance Committee and Board of Directors. The IPS provides a framework for the management and oversight of the Company’s managed investment portfolio (“managed investments”), which excludes investments held in support of consolidated AlphaCat variable interest entities (“VIEs”) (“non-managed investments”) that are invested in accordance with the offering documentation of each company managed by AlphaCat Managers. The purpose of the IPS is to:
•
Communicate and align the Company’s investment philosophy and goals;
•
Provide transparency regarding investment policies, procedures and controls;
•
Set expectations and priorities of our third party investment managers;
•
Establish a framework for integrating investment management into our overall ERM process;
•
Mandate our investment parameters, including permissible asset classes and portfolio constraints, and governance structure for portfolio oversight and management;
•
Establish formalized criteria to measure, monitor, and evaluate investment performance and risk exposures on a regular basis; and
•
Ensure assets are invested in accordance with the overall financial goals and risk tolerances of the Company.
The IPS is updated annually or as otherwise appropriate to reflect changes to the Company, the economy, the investment environment, the regulatory environment or other factors.
Claims Management
Claims management includes the receipt of initial loss notifications, generation of appropriate responses to claim reports, identification and handling of coverage issues, determination of whether further investigation is required and, where appropriate, retention of legal representation, establishment of case reserves, approval of loss payments and notification to brokers and reinsurers.
Our claims departments are responsible for the investigation, evaluation and, if validated, efficient payment of claims. We maintain claims handling guidelines and reporting and control procedures across all of our claims departments. Our primary objective is to ensure that each claim is evaluated, processed and appropriately documented in a timely and efficient manner and that information relevant to the management of the claim is retained.
For business written in the Lloyd’s market, claims handling and case reserves are established in accordance with the applicable Lloyd’s Claims Scheme and Lloyd’s Claims Management Principles and Minimum Standards.
Competition
The (re)insurance industries are highly competitive. We compete with major U.S., Bermuda, European and other international (re)insurers and certain underwriting syndicates and insurers. We encounter competition in all of our classes of business but there is less competition in those of our lines where we are a specialist underwriter. The Company competes with (re)insurance providers such as:
•
Alleghany Corporation, Arch Capital Group, Limited, Argo Group International Holdings, Ltd., Aspen Insurance Holdings Limited, AXIS Capital Holdings Limited, Everest Re Group Ltd., RenaissanceRe Holdings Ltd., XL Group Ltd. and others in the reinsurance market;
•
MS Amlin plc, Beazley plc, Brit plc, Hiscox Ltd. and others in the Lloyd’s market;
•
Scottsdale Insurance Company, Burlington Insurance Company, Nautilus Insurance Company, Essex Insurance Company, Penn-America Group, Inc., Colony Specialty Insurance Company, RSUI Group, Inc., and others in the U.S. excess and surplus market;
•
Asset managers and reinsurers who provide collateralized reinsurance and retrocessional coverage;
•
Treaty and direct insurers, in the London and global markets, that compete with Lloyd’s on a worldwide basis;
•
Various capital markets participants who access (re)insurance business in securitized form, including through special purpose entities or derivative transactions; and
•
Government-sponsored insurers and reinsurers.
Competition varies depending on the type of business being (re)insured and whether the Company is in a leading or following position. Competition in the types of business that the Company underwrites is based on many factors, including:
•
premiums charged and other terms and conditions offered;
•
services provided;
•
financial ratings assigned by independent rating agencies;

12

•
speed of claims payment;
•
reputation;
•
perceived financial strength; and
•
the experience of the underwriter in the line of (re)insurance written.
Increased competition could result in fewer submissions, lower premium rates, lower share of allocated cover, and less favorable policy terms, all of which could adversely impact the Company’s growth and profitability. Capital market participants have created alternative products such as catastrophe bonds that are intended to compete with reinsurance products. The Company is unable to predict the extent to which these new, proposed or potential initiatives may affect the demand for products or the risks that may be available to be underwritten.
Regulation
The following is a discussion of the regulatory environment and certain key requirements in the jurisdictions of our significant operating subsidiaries.
Bermuda
General: The Insurance Act 1978 and its related regulations (the “Insurance Act”) regulates the Company’s operating insurance subsidiaries in Bermuda as well as the insurance group, the Validus Holdings Group, which the Bermuda Monetary Authority (the “BMA”) is the group supervisor of.
The Company has five Bermuda based insurance subsidiaries: Validus Re, a Class 4 insurer; Validus Re Swiss (Bermuda Branch), a Class 4 insurer; IPCRe Limited, a Class 3A insurer; AlphaCat Re, a Class 3 insurer; and Mont Fort Re Ltd., a Class 3 insurer. The Company also has two Bermuda-based insurance subsidiaries, AlphaCat Re 2011, Ltd. and AlphaCat Re 2012, Ltd., each licensed as a Special Purpose Insurer (“SPI”) under the Insurance Act and one licensed insurance manager, AlphaCat Managers. The summary below is limited to Class 3, 3A and 4 insurers and insurance groups.
Annual Requirements: Class 3, 3A and 4 insurers’ significant requirements include: the appointment of an approved independent auditor; the appointment of a principal representative in Bermuda; maintenance of a principal office in Bermuda; the appointment of a loss reserve specialist; the filing of annual Statutory Financial Returns; the filing of annual GAAP financial statements; the filing of an annual Capital and Solvency Return; compliance with minimum enhanced capital requirements; and compliance with the Insurance Code of Conduct. Class 3A and 4 insurers must also maintain their head office in Bermuda.
Statutory Financial Return: The statutory financial return for Class 3 insurers includes the statutory financial statements, and among other items, an auditor’s report, a cover sheet, a general business solvency certificate in relation to any general business undertaken, statutory declaration, statement of changes of control, own risk statement, underwriting analysis, schedule of segregated accounts where applicable, the opinion of the loss reserve specialist and a special purpose business solvency certificate in relation to any special purpose business undertaken.
The statutory financial return for Class 3A and 4 insurers includes the statutory financial statements which are comprised of the GAAP Financial Statements referred to below subject to application of certain prudential filters contained in the Insurance Account Rules 2016, and among other items, an auditor’s report and an insurer information sheet. Class 3, 3A, and 4 insurers are also required to submit a declaration of compliance to the BMA together with the statutory financial statements. In addition, Class 3A and 4 insurers are required to file a capital and solvency return in respect of their general business which include, amongst other items, the regulatory risk based capital model, the opinion of the loss reserve specialist, commercial insurer solvency self-assessment, catastrophe risk return, reconciliation of net loss reserves or schedule of loss triangles and an eligible capital and operational risk assessment.
GAAP Financial Statements: Class 3A and 4 insurers must prepare and submit, on an annual basis, audited financial statements, including notes, prepared under International Financial Reporting Standards or any other BMA acceptable GAAP standard (“GAAP Financial Statements”). The GAAP Financial Statements must be audited annually by the insurer’s approved auditor who must prepare an auditor’s report in accordance with generally accepted auditing standards. The insurer is required to file with the BMA annually the audited GAAP Financial Statements within four months from the end of the relevant financial year (unless specifically extended) which are published by the BMA on its website.
Minimum Solvency Margins: The value of the general business assets of licensed insurers must exceed the amount of its general business liabilities by an amount greater than its prescribed minimum solvency margin (“MSM”). The MSM for a Class 4 insurer is the greater of (i) $100.0 million, or (ii) 50% of net premiums written (with a deduction for reinsurance premiums ceded not exceeding 25% of gross premiums written) or (iii) 15% of aggregate net loss and loss expense provisions and other insurance reserves, or (iv) 25% of the enhanced capital requirement. The MSM for a Class 3 & 3A insurer is the greater of (i) $1.0 million, or (ii) 20% of the first $6.0 million of net premiums written or where net premiums written exceed $6.0 million, $1.2 million plus 15% of net premiums written in excess of $6.0 million, or (iii) 15% of aggregate net loss and loss expense provisions and other insurance reserves, or (iv) in the case of Class 3A insurers only 25% of the insurer’s enhanced capital requirement.

13

Enhanced Capital Requirement: Class 3A and 4 insurers are required to maintain available statutory economic capital and surplus with respect to its general business at an amount that is equal to or exceeds the value of the enhanced capital requirement (“ECR”) which is calculated at the end of its relevant year by reference to the Bermuda Solvency Capital Requirement (“BSCR”) model or an approved internal capital model, provided that the ECR must always equal or exceed the MSM. The BMA expects Class 3A and 4 insurers to operate at or above a target capital level (“TCL”) which exceeds the insurer’s ECR. The TCL for a Class 3A and 4 insurer is set at 120% of its ECR.
Minimum Liquidity Ratio: The Insurance Act provides a minimum liquidity ratio for general business insurers. An insurer engaged in general business is required to maintain the value of its relevant assets at not less than 75% of the amount of its relevant liabilities. Relevant assets include, but are not limited to, cash and time deposits, quoted investments, unquoted bonds and debentures, investment income due and accrued, accounts and premiums receivable, insurance and reinsurance balances receivable and funds held by ceding reinsurers. Relevant liabilities include, but are not limited to, general business insurance reserves and total other liabilities less deferred income tax and sundry liabilities, letters of credit and guarantees.
Restrictions on Dividends and Distributions: A Class 3A and 4 insurer must not declare or pay any dividends of more than 25% of its total statutory capital and surplus as shown on its previous financial year statutory balance sheet, unless at least seven days before payment of the dividend it files with the BMA an affidavit confirming that it will continue to meet its relevant margins following such dividend payment. If it failed to meet any of its relevant margins on the last day of any financial year, a Class 3, 3A and 4 insurer shall not, without the approval of the BMA, declare or pay any dividends during the next financial year. In addition, Class 3, 3A and 4 insurers must obtain the BMA’s prior approval before reducing its total statutory capital, as shown in its previous year’s financial statements, by 15% or more. Furthermore, under the Companies Act, a Bermuda company may only declare or pay a dividend, or make a distribution out of contributed surplus as the case may be, if the company has no reasonable grounds for believing that it is, or would after the payment be, unable to pay its liabilities as they become due, or if the realizable value of its assets would be less than its liabilities.
BMA Insurance Code of Conduct: All insurers are required to comply with the BMA’s Insurance Code of Conduct which establishes duties, requirements and standards to be complied with to ensure each insurer implements sound corporate governance, risk management and internal controls. Failure to comply with these requirements may be taken into account by the BMA in determining whether an insurer is conducting its business in a sound and prudent manner.
Group Supervision: The BMA may, in respect of an insurance group, determine whether it is appropriate for it to be the group supervisor of that group. For purposes of the Insurance Act, an insurance group is defined as a group of companies that conducts insurance business. Where the BMA determines that it is the group supervisor, it shall designate a specified insurer that is a member of the insurance group to be the “designated insurer” in respect of that insurance group and it shall give written notice to the designated insurer and other competent authorities that it is the group supervisor. The BMA is the group supervisor of the Validus Holdings Group and has designated Validus Re as the “designated insurer” of the group. The designated insurer is required to ensure that the Validus Holdings Group complies with the provisions of the Insurance Act pertaining to groups comprising primarily the Insurance (Prudential Standards) (Insurance Group Solvency Requirement) Rules 2011 and Insurance (Group Supervision) Rules 2011 (together, “Group Rules”).
Group Annual Requirements: Every insurance group is required to submit to the BMA (i) consolidated audited financial statements prepared under International Financial Reporting Standards or any GAAP recognized by the BMA, (ii) an annual group statutory financial return and (iii) a group capital and solvency return including the annual group actuarial opinion. The designated insurer is required to ensure that the group appoints an actuary approved by the BMA to provide an opinion on the insurance group’s insurance technical provisions in accordance with the Group Rules. In addition to the annual filings every insurance group is required to prepare and file quarterly financial returns for the first, second and third financial quarters. The quarterly financial return comprises unaudited consolidated group financial statements, a schedule of material intra-group exposures and risk concentrations.
Group Solvency Margin: An insurance group must ensure that the value of the insurance group’s total statutory economic capital and surplus calculated in accordance with the Group Rules exceeds the aggregate of: (i) the aggregate MSM of each qualifying member of the group controlled by the parent company; and (ii) the parent company’s percentage shareholding in the member multiplied by the member’s MSM, where the parent company exercises significant influence over a member of the group but does not control the member (the “Group MSM”). A member is a qualifying member of the insurance group if it is subject to solvency requirements in the jurisdiction in which it is registered.
Group Enhanced Capital Requirements: Insurance groups are required to maintain available statutory economic capital and surplus to an amount that is equal to or exceeds the value of its group enhanced capital requirement (“Group ECR”) which is calculated at the end of its relevant year by reference to the Group BSCR model or an approved internal capital model provided that the Group ECR shall at all times be an amount equal to or exceeding the Group MSM.
Eligible Capital: To enable the BMA to assess the quality of an insurer’s capital resources, Class 3A and 4 insurers and insurance groups must maintain available statutory capital and surplus in accordance with a ‘3 tiered capital regime’. All capital

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instruments are classified as either basic or ancillary capital which in turn are classified into one of three tiers (Tiers 1, 2 and 3) based on their loss absorbency and other characteristics (“Tiered Capital Requirements”). Eligibility limits are then applied to each tier in determining the amounts eligible to cover regulatory capital requirement levels. The highest capital is classified as Tier 1 Capital; lesser quality capital is classified as either Tier 2 Capital or Tier 3 Capital. Under this regime, not more than certain specified percentages of Tier 1, Tier 2 and Tier 3 Capital may be used to satisfy the Class 3A and 4 insurers’ MSM and ECR requirements and Group’s MSM and Group’s ECR requirements.
Public Disclosures: Commercial insurers and insurance groups are required to prepare and publish, on an annual basis, a Financial Condition Report (“FCR”). The FCR provides details of measures governing the business operations, corporate governance framework, solvency and financial performance.
BMA’s Powers of Investigation, Intervention and Obtaining Information: The BMA may require a registered person or a designated insurer to provide such information the BMA may reasonably require with respect to matters that are likely to be material to the performance of its functions under the Insurance Act. In addition, it may require such person’s or designated insurer’s auditor, underwriter, accountant or any other person with relevant professional skill to prepare a report on any aspect pertaining thereto. The BMA has certain powers of investigation relating to insurers and insurance groups which it may exercise in the interest of such insurer’s policyholders or potential policyholders. The BMA has certain powers of intervention relating to registered persons including insurers, if amongst other things, there is any significant risk of insolvency or risk of not being able to meet its policyholders’ obligations, or a breach of the Insurance Act or the registered person’s license conditions or a registered insurer is in breach of its ECR.
The BMA has the power to assist foreign regulatory authorities which have requested assistance in connection with inquiries being carried out by it or on its behalf in certain circumstances.
Shareholder Controller and other Notifications: Under the Insurance Act each shareholder or prospective shareholder will be responsible for notifying the BMA in writing if the shareholder becomes a controller, directly or indirectly, of 10%, 20%, 33% or 50% of the Company (“Shareholder Controller”) or any of its insurance subsidiaries. Such notification must be made within 45 days of the acquisition in respect of the Company or Validus Re, and either in advance or no later than 45 days after the acquisition, in respect of the Company’s other insurance subsidiaries depending upon the insurer to which the notification relates.
In addition, where a Shareholder Controller reduces its shareholding to or past such noted shareholding thresholds in any of the Company’s Class 3A or Class 4 insurance subsidiaries, such Shareholder Controller must notify the BMA either in advance or no later than 45 days after the reduction or disposal depending upon the insurer to which the notification relates. The BMA may serve a notice of objection on any controller of the Company’s Bermuda insurance subsidiaries if it appears to the BMA that the person is not or is no longer a fit and proper person to be such a controller.
The Company’s Bermuda insurance subsidiaries are required to notify the BMA in writing in the event of any person becoming or ceasing to be a controller of the insurer. A controller includes a managing director or a chief executive of the insurer or of another company of which it is a subsidiary, or any other person in accordance with whose directions or instructions the directors or controllers of the insurer or a company of which the insurer is a subsidiary are accustomed to act, including any person who holds, or is entitled to exercise, 10% or more of the voting shares or voting power or is able to exercise a significant influence over the management of the insurer or a company of which the insurer is a subsidiary pursuant to the provisions of the Insurance Act. In addition an insurer and a designated insurer in respect of the parent company of the insurance group is required to notify the BMA in the event of any person becoming or ceasing to be an officer of the insurer or of the parent company of the group. An officer includes a director, chief executive or senior executive performing duties of underwriting, actuarial, risk management, compliance, internal audit, finance or investment matters.
Material Change Notifications: All insurers are required to give 30 days’ notice to the BMA of their intention to effect a material change within the meaning of the Insurance Act. Designated insurers are also required to give notice to the BMA if any member of its group intends to give effect to certain material changes within 30 days of such material change taking effect. For the purposes of the Insurance Act, the following changes are material: (i) the transfer or acquisition of insurance business that is part of a scheme falling under section 25 of the Insurance Act or section 99 of the Companies Act; (ii) the amalgamation with or acquisition of another firm; (iii) engaging in unrelated business that is retail business; (iv) the acquisition of a controlling interest in an undertaking that is engaged in non-insurance business which offers services and products to persons who are not affiliates of the insurer; (v) outsourcing all or substantially all of an insurer’s actuarial, risk management and internal audit functions; (vi) outsourcing all or a material part of an insurer’s underwriting activity; (vii) the transfer, other than by way of reinsurance, of all or substantially all of a line of business; (viii) the expansion into a material new line of business; and (ix) the sale of an insurer.
United States
General: Western World’s operating subsidiaries are domiciled in the state of New Hampshire. WWIC operates as a surplus lines insurer in all U.S. jurisdictions other than New Hampshire. Tudor is licensed as a domestic surplus lines insurer in New Hampshire and is authorized to conduct business as a surplus lines insurer in all other U.S. jurisdictions. Stratford operates as an admitted insurer

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in 50 U.S. jurisdictions. Talbot operates within the Lloyd’s insurance market through the Talbot Syndicate, and Lloyd’s operations are subject to regulation in the United States in addition to being regulated in the United Kingdom, as discussed further below. The Lloyd’s market is licensed to engage in insurance business in Illinois, Kentucky and the U.S. Virgin Islands and operates as an eligible excess and surplus lines insurer in all states and territories except Kentucky and the U.S. Virgin Islands. Validus Reaseguros, Inc. and Validus Specialty are licensed reinsurance intermediaries in Florida and New York, respectively. Validus Re America (New Jersey) Inc. is a licensed reinsurance intermediary in New Jersey and New York.
Much of state insurance regulation follows model statutes or regulations developed or amended by the National Association of Insurance Commissioners (“NAIC”) which is governed by the chief insurance regulators of each U.S. jurisdiction. Through the NAIC, state insurance regulators establish standards, best practices and coordinate regulatory oversight.
Holding Company Regulation: Western World’s operating subsidiaries are subject to the insurance holding company laws of the state of New Hampshire. These regulations generally provide that each insurance company in the system is required to register with the state insurance department and furnish information concerning the operations of companies within the holding company system which may materially affect the operations, management or financial condition of the insurers within the system. All transactions within a holding company system affecting insurers must be fair and reasonable and notice to the state insurance department is required prior to the consummation of certain material transactions between an insurer and any entity in its holding company system. In addition, certain of such transactions cannot be consummated without prior approval from the state insurance department, or its failure to disapprove after receiving notice. The holding company acts also prohibit any person from directly or indirectly acquiring control of a U.S. insurance company unless that person has filed an application with specified information with the insurance company’s domiciliary commissioner and has obtained the commissioner’s prior approval. Under most states’ statutes, including New Hampshire, acquiring 10% or more of the voting securities of an insurance company or its parent company is presumptively considered an acquisition of control of the insurance company, although such presumption may be rebutted. Accordingly, any person or entity that acquires, directly or indirectly, 10% or more of the voting securities a U.S. insurance company without the prior approval of the commissioner will be in violation of these laws and may be subject to injunctive action requiring the disposition or seizure of those securities by the commissioner or prohibiting the voting of those securities, or to other actions that may be taken by the commissioner.
In 2010, the NAIC adopted amendments to the Insurance Holding Company System Regulatory Act and Regulation, which, among other changes, introduce the concept of “enterprise risk” within an insurance holding company system. If and when the amendments are adopted by a particular state, the amended Insurance Holding Company System Regulatory Act and Regulation would impose more extensive informational requirements on parents and other affiliates of licensed insurers or reinsurers with the purpose of protecting them from enterprise risk, including requiring an annual enterprise risk report by the ultimate controlling person identifying the material risks within the insurance holding company system that could pose enterprise risk to the licensed companies. The amended Insurance Holding Company System Regulatory Act also requires any controlling person of a U.S. insurance company seeking to divest its controlling interest in the insurance company to file with the commissioner a confidential notice of the proposed divestiture at least 30 days prior to the cessation of control; after receipt of the notice, the commissioner shall determine those instances in which the parties seeking to divest or to acquire a controlling interest will be required to file for or obtain approval of the transaction. The amended Insurance Holding Company System Regulatory Act and Regulation must be adopted by the individual states for the new requirements to apply to U.S. domestic insurers and reinsurers. To date, only certain states, including New Hampshire, have enacted legislation adopting the amended Insurance Holding Company System Regulatory Act in some form.
Enterprise Risk: The NAIC has increased its focus on risks within an insurer’s holding company system that may pose enterprise risk to the insurer. “Enterprise risk” is defined as any activity, circumstance, event or series of events involving one or more affiliates of an insurer that, if not remedied promptly, is likely to have a material adverse effect upon the financial condition or the liquidity of the insurer or its insurance holding company system as a whole. As noted above, the NAIC adopted amendments to its Model Insurance Holding Company System Regulatory Act and Regulation, which include, among other amendments, a requirement for the ultimate controlling person to file an enterprise risk report. In 2012, the NAIC adopted the Risk Management and Own Risk and Solvency Assessment (“ORSA”) Model Act, which requires domestic insurers to maintain a risk management framework and establishes a legal requirement for domestic insurers to conduct an ORSA in accordance with the NAIC’s ORSA Guidance Manual. The ORSA Model Act provides that domestic insurers, or their insurance group, must regularly conduct an ORSA consistent with a process comparable to the ORSA Guidance Manual process. The ORSA Model Act also provides that, no more than once a year, an insurer’s domiciliary regulator may request that an insurer submit an ORSA summary report, or any combination of reports that together contain the information described in the ORSA Guidance Manual, with respect to the insurer and/or the insurance group of which it is a member. If and when the ORSA Model Act is adopted by a particular state, the ORSA Model Act would impose more extensive filing requirements on parents and other affiliates of domestic insurers.
Statutory Accounting Practices: Statutory accounting practices, or “SAP,” are a basis of accounting developed to assist U.S. insurance regulators in monitoring and regulating the solvency of insurance companies. It is primarily concerned with measuring an insurer’s surplus to policyholders. Accordingly, statutory accounting focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with appropriate insurance law and regulatory provisions applicable in each insurer’s domiciliary state.

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U.S. GAAP concerns an insurer’s solvency, but it also concerns other financial measurements, such as income and cash flows. Accordingly, U.S. GAAP gives more consideration to appropriate matching of revenue and expenses and accounting for management’s stewardship of assets than does SAP. As a direct result, different assets and liabilities and different amounts of assets and liabilities will be reflected in financial statements prepared in accordance with U.S. GAAP as opposed to SAP.
SAP established by the NAIC and adopted, in part, by the New Hampshire insurance regulator, determine, among other things, the amount of statutory surplus and statutory net income of Western World’s operating subsidiaries and thus determine, in part, the amount of funds they have available to pay dividends.
Restrictions on Dividends and Distributions: The ability of an insurer to pay dividends or make other distributions is subject to insurance regulatory limitations of the insurance company’s state of domicile. Generally, such laws limit the payment of dividends or other distributions above a specified level. Dividends or other distributions in excess of such thresholds are “extraordinary” and are subject to prior regulatory approval. Such dividends or distributions may be subject to applicable withholding or other taxes. Refer to Note 26 to the Consolidated Financial Statements, “Statutory and regulatory requirements,” in Part II, Item 8.
Insurance Regulatory Information System Ratios: The NAIC Insurance Regulatory Information System (“IRIS”) was developed by a committee of state insurance regulators and is intended primarily to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies 13 industry ratios (referred to as “IRIS ratios”) and specifies “usual values” for each ratio. Departure from the usual values of the IRIS ratios can lead to inquiries from individual state insurance commissioners as to certain aspects of an insurer’s business. Our insurance subsidiaries have consistently met the majority of the IRIS ratio tests.
Risk-Based Capital Requirements: In order to enhance the regulation of insurer solvency, the NAIC adopted in December 1993 a formula and model law to implement risk-based capital requirements for property and casualty insurance companies. These risk-based capital requirements are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholder obligations. The risk-based capital model for property and casualty insurance companies measures three major areas of risk facing property and casualty insurers:
•underwriting, which encompasses the risk of adverse loss developments and inadequate pricing;
•declines in asset values arising from credit risk; and
•declines in asset values arising from investment risks.
An insurer will be subject to varying degrees of regulatory action depending on how its statutory surplus compares to its risk-based capital calculation. For equity investments in an insurance company affiliate, the risk-based capital requirements for the equity securities of such affiliate would generally be our U.S.-based subsidiaries’ proportionate share of the affiliate’s risk-based capital requirement.
Under the approved formula, an insurer’s total adjusted capital is compared to its authorized control level risk-based capital. If this ratio is above a minimum threshold, no company or regulatory action is necessary. Below this threshold are four distinct action levels at which a regulator can intervene with increasing degrees of authority over an insurer as the ratio of surplus to risk-based capital requirement decreases. The four action levels include:
•insurer is required to submit a plan for corrective action;
•insurer is subject to examination, analysis and specific corrective action;
•regulators may place insurer under regulatory control; and
•regulators are required to place insurer under regulatory control.
Western World’s operating subsidiaries’ surplus (as calculated for statutory purposes) is above the risk-based capital thresholds that would require either company or regulatory action.
Guaranty Funds: Most states require all admitted insurance companies to participate in their respective guaranty funds which cover certain claims against insolvent insurers. Solvent insurers licensed in these states are required to cover the losses paid on behalf of insolvent insurers by the guaranty funds and are generally subject to annual assessments in the states by the guaranty funds to cover these losses.
Federal Regulation: Although state regulation is the dominant form of regulation for insurance business, the U.S. federal government in recent years has shown some concern over the adequacy of state regulation. It is not possible to predict the future impact of any potential federal regulations or other possible laws or regulations on our U.S. based subsidiaries’ capital and operations, and such laws or regulations could materially adversely affect their business. In addition, a number of federal laws affect and apply to the insurance industry, including various privacy laws and the economic and trade sanctions implemented by the Office of Foreign Assets Control (“OFAC”). OFAC maintains and enforces economic sanctions against certain foreign countries and groups and

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prohibits U.S. persons from engaging in certain transactions with certain persons or entities. OFAC has imposed civil penalties on persons, including insurance companies, arising from violations of its economic sanctions program.
The Dodd-Frank Wall Street Reform and Consumer Protection Act: The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) created the Federal Insurance Office (“FIO”) within the Department of Treasury, which is not a federal regulator or supervisor of insurance, but monitors the insurance industry for systemic risk, consults with the states regarding insurance matters and develops federal policy on aspects of international insurance matters. The Dodd-Frank Act also created a uniform system for non-admitted insurance premium tax payments based on the home state of the policyholder and provides for single state regulation for financial solvency and credit for reinsurance as discussed below.
Credit for Reinsurance: Certain provisions of the Dodd-Frank Act, which became effective on July 21, 2011, provide that only the state in which a primary insurer is domiciled may regulate the financial statement credit for reinsurance taken by that primary insurer. U.S. domiciled ceding companies typically receive full credit for outwards reinsurance protections in their statutory financial statements with respect to liabilities ceded to admitted U.S. domestic reinsurers. However, most states in the U.S. do not confer full credit for outwards reinsurance protections for liabilities ceded to non-admitted or unlicensed reinsurers, unless the reinsurer specifically collateralizes its obligations to the ceding company or is an authorized or trusteed reinsurer in the ceding company’s state of domicile through the establishment of a Multi-Beneficiary Reinsurance Trust (“MBRT”). 
In December 2014, Validus Re established a MBRT to collateralize its (re)insurance liabilities associated with and for the benefit of U.S. domiciled cedants, and was approved as a trusteed reinsurer in the State of New Jersey. As a result, cedants domiciled in that state will receive automatic credit in their regulatory filings for the reinsurance provided prospectively by the Company. Following the approval by the State of New Jersey, the Company submitted applications in most other U.S. states and territories, respectively, to become a trusteed reinsurer. As of December 31, 2017, Validus Re was approved as a trusteed reinsurer in 48 states as well as Puerto Rico and the District of Columbia. In addition, Validus Re Swiss established a MBRT in December 2015 and was approved as a trusteed reinsurer in 47 states as well as Puerto Rico and the District of Columbia as of December 31, 2017. It is our intention over time to transition U.S. domiciled cedants with outstanding letters of credit to the MBRT and therefore reduce our reliance on letters of credit. Through Lloyd’s, the Talbot Syndicate is also an accredited reinsurer in all states and territories of the United States. Lloyd’s maintains various trust funds in the state of New York to protect its U.S. business and is therefore subject to regulation by the New York Department of Financial Services, which acts as the domiciliary department for Lloyd’s U.S. trust funds. There are deposit trust funds in other states to support Lloyd’s reinsurance and excess and surplus lines insurance business.
As a result of the requirements relating to the provision of credit for reinsurance, our reinsurance companies are indirectly subject to certain regulatory requirements imposed by jurisdictions in which ceding companies are approved as trusteed reinsurers. In addition, the (re)insurance regulatory framework of Bermuda and the insurance of U.S. risk by companies based in Bermuda and not licensed or authorized in the United States recently has become the subject of increased scrutiny in many jurisdictions, including the United States. We are not able to predict the future impact of changes in the laws and regulation to which we are or may become subject on the Company’s financial condition or results of operations.
Tax Regulations: Talbot is subject to a Closing Agreement between Lloyd’s and the U.S. Internal Revenue Service pursuant to which Talbot is subject to U.S. federal income tax to the extent its income is attributable to U.S. agents who have authority to bind business on behalf of the Talbot Syndicate. Specifically, U.S. federal income tax is imposed on its income attributable to U.S. binding authorities.
Other Regulations: AlphaCat Managers is a licensed insurance manager and is registered as an investment adviser with the U.S. Securities and Exchange Commission under the U.S. Investment Advisers Act of 1940, as amended. AlphaCat Managers is also registered as a “commodity pool operator” with the Commodity Futures Trading Commission (the “CFTC”) and is a member of the National Futures Association.
United Kingdom
U.K. regulation of insurance is provided for by the Financial Services and Markets Act 2000 and operated, following the Financial Services Act 2012, by two focused regulators; the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority (“PRA”). The Bank of England and Financial Services Act 2016 strengthens this regulation.
The FCA’s stated purpose is to “make financial markets work well so that consumers get a fair deal.” Its goals are protecting consumers, enhancing market integrity and promoting competition.
The PRA sets prudential regulation rules to require financial firms to hold sufficient capital and to have adequate risk controls in place. Close supervision of firms ensures that the PRA has a comprehensive overview of their activities so that it can step in if they are not being run in a safe and sound way or if they are not protecting policyholders adequately.
In relation to insurance, the FCA and PRA both regulate insurers, insurance intermediaries and Lloyd’s itself. The FCA, PRA and Lloyd’s have common objectives in ensuring that the Lloyd’s market is appropriately regulated.

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Talbot’s underwriting activities are therefore regulated by both the FCA and PRA as well as being subject to the Lloyd’s franchise rules and minimum standards. All three have powers to remove their respective authorization for Talbot to manage Lloyd’s syndicates. Lloyd’s also approves the Talbot Syndicate’s business plan annually as well as any subsequent material changes, together with the amount of capital (known as Funds at Lloyd’s or “FAL”) required to support that plan. Lloyd’s may require changes to any business plan presented to it or additional FAL to be provided to support the underwriting.
An EU directive covering the capital adequacy, risk management and regulatory reporting for insurers, known as Solvency II was adopted by the European Parliament in April 2009. Solvency II came into force on January 1, 2016. The Lloyd’s Solvency II internal model, which covers all members at Lloyd’s, in aggregate, was approved by the PRA in December 2015. Talbot is currently in compliance with all Solvency II requirements.
The Company operates a number of approved Lloyd’s coverholders which provide business to the Talbot Syndicate. These are Talbot Underwriting Risk Services, Ltd. (London), Validus Specialty, Talbot Underwriting (MENA) Ltd. (Dubai), Validus Reaseguros, Inc. (Miami), Talbot Underwriting (LATAM) S.A. (Chile) and Talbot Risk Services Pte. Ltd. (Singapore and Australia).
Switzerland
Our Swiss reinsurance subsidiary, Validus Re Swiss, is a company limited by shares and headquartered in Zurich, Switzerland. Validus Re Swiss maintains a branch office in Bermuda, Validus Re Swiss (Bermuda Branch), a Class 4 insurer.
Regulation and Supervision: Validus Re Swiss obtained its reinsurance license from the Swiss Federal Office of Private Insurance (now the Swiss Financial Market Supervisory Authority or “FINMA”) in December 2006.
Under Swiss rules and regulations, Swiss reinsurance companies are generally subject to many, but not all, of the same provisions that apply to direct insurers, and include the following obligations:
Adequacy of Financial Resources: The minimum capital for the reinsurance license that Validus Re Swiss holds is CHF 10 million. In addition, Validus Re Swiss must maintain adequate solvency and disposable and unencumbered capital resources to cover its entire activities in accordance with solvency requirement as stipulated by Swiss insurance legislation. 
Solvency is determined based on the Swiss Solvency Test (“SST”). Under this approach, a company’s capital is considered adequate if its risk bearing capital (“RBC”) exceeds its target capital (“TC”). RBC is defined as the difference between assets at a market-consistent value and discounted best estimated liabilities. TC is defined as the sum of a market value margin and the difference between the discounted one-year RBC and the current year RBC. The SST involves a sophisticated analysis to calculate the market-consistent valuation of all assets and liabilities with a methodological approach to risk categories (insurance risk, credit risk, etc.) subjecting them to scenario stress tests at a basic level in the context of the standard regulatory approach but, where appropriate, permitting the use of internal models in the overall management of risk, once such models are validated. 
The SST is very close to the “Solvency II” standard of the European Union. On June 5, 2015, Switzerland was granted full equivalence by the European Commission in all three areas of Solvency II: solvency calculation, group supervision and reinsurance. This decision was the outcome of a detailed assessment conducted by the European Insurance and Occupational Pensions Authority (“EIOPA”).
For the SST all assets of Validus Re Swiss are considered. There is no direct constraint on permitted investments since the provisions regarding assets linked to reserves in the Swiss insurance legislation do not apply to reinsurance firms. However, the use of derivative instruments is required to be fully considered as part of the risk management processes and limited to reducing investment or insurance risk or to secure investment efficiencies.
Annual Reporting and Disclosure: Validus Re Swiss is required to prepare an annual report at the end of each financial year on the solvency margins available as well as the calculation of target capital and on risk bearing capital. Validus Re Swiss also files a corporate report incorporating audited financial statements prepared in accordance with Swiss law and a supervisory report in the prescribed format.
In addition, the following regulatory reporting requirements exist for Validus Re Swiss:
Own Risk and Solvency Assessment (“ORSA”): The requirements provide that Swiss domiciled reinsurance companies must maintain a risk management framework and ORSA process which is defined in an internal “ORSA policy.” The ORSA policy must outline all the processes and procedures undertaken to identify, evaluate, monitor and manage risks during the course of business as well as the processes and procedures performed to determine capital adequacy. The ORSA process is required to be performed on a yearly basis and an ORSA report has to be submitted to FINMA no later than January 31 of each year.
Public Disclosure: The legislation requires Swiss domiciled reinsurance companies to publish a report on their financial situation. The report needs to be submitted to FINMA and made accessible to the public by April 30 of each year. It requires companies to provide details on their business activities, company results, corporate governance and risk management, risk profile, the valuation basis for assets and liabilities, capital and solvency.

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Capital Structure and Dividends: Validus Re Swiss is funded by equity in the form of paid in share capital and share premium. Under Swiss corporate law as modified by insurance supervisory law, a non-life insurance company is obliged to contribute to statutory legal reserves a minimum of 20% of any annual profit up to 50% of statutory capital, being paid in share capital (or capital contribution reserves). Validus Re Swiss has been substantially funded by share premium, exceeding 50% of the company’s share capital. As of the date of this Annual Report, capital contribution reserves can be distributed to shareholders without being subject to withholding tax. However, the distribution of any dividend to shareholders remains subject to the approval of FINMA which has regard to the maintenance of solvency and the interests of reinsureds and creditors.
Employment Practices
The following table details our personnel by geographic location as at December 31, 2017:
Country
 
Number of employees
 
%
United States
 
695

 
55.0
%
United Kingdom
 
324

 
25.6
%
Bermuda
 
137

 
10.8
%
Canada
 
37

 
2.9
%
Singapore
 
37

 
2.9
%
United Arab Emirates
 
11

 
0.9
%
Chile
 
9

 
0.7
%
Switzerland
 
7

 
0.6
%
Australia
 
7

 
0.6
%
Total
 
1,264

 
100.0
%
We believe our relations with our employees are excellent.
Executive Officers of the Company
The following table provides information regarding our executive officers and key employees as of February 28, 2018:
Name
 
Age
 
Position
Edward J. Noonan
 
59
 
Chairman of the Board of Directors and Chief Executive Officer of the Validus Group
Jeffrey D. Sangster
 
45
 
Executive Vice President and Chief Financial Officer
Peter Bilsby
 
48
 
Global Head of Insurance and Chief Executive Officer of the Talbot Group
Patrick Boisvert
 
44
 
Executive Vice President and Chief Accounting Officer
Kean D. Driscoll
 
44
 
Global Head of Reinsurance, President of Validus Holdings and Chief Executive Officer of Validus Reinsurance, Ltd.
John J. Hendrickson
 
57
 
Director of Strategy, Risk Management and Corporate Development
Andrew E. Kudera
 
58
 
Executive Vice President and Chief Actuary
Robert F. Kuzloski
 
54
 
Executive Vice President and General Counsel
Michael R. Moore
 
48
 
Executive Vice President and Chief Operating Officer
Jonathan P. Ritz
 
50
 
President of Western World Insurance Group, Inc. and Chief Executive Officer of Validus Specialty
Romel Salam
 
51
 
Executive Vice President and Chief Risk Officer
Lixin Zeng
 
49
 
Global Head of Asset Management and Chief Executive Officer of AlphaCat Managers Ltd.
Edward J. Noonan has been Chairman of our Board and the Chief Executive Officer of the Validus Group since its formation. Mr. Noonan has over 30 years of experience in the (re)insurance industry, serving most recently as the acting Chief Executive Officer of United America Indemnity Ltd. from February 2005 through October 2005 and as a member of the Board of Directors from December 2003 to May 2007. Mr. Noonan served as President and Chief Executive Officer of American Re-Insurance Company from 1997 to 2002, having joined American Re in 1983. Mr. Noonan also served as Chairman of Inter-Ocean Reinsurance Holdings of Hamilton, Bermuda from 1997 to 2002. Prior to joining American Re, Mr. Noonan worked at Swiss Reinsurance from 1979 to 1983. Mr. Noonan received a B.S. in Finance from St. John’s University in 1979. Mr. Noonan is also a director of Central Mutual Insurance Company and All American Insurance Company, both of which are property and casualty companies based in Ohio.
Jeffrey D. Sangster has served as Executive Vice President and Chief Financial Officer of the Company since February 2013. Mr. Sangster joined the Company in October 2006 and has served in various finance positions during that time, including Chief Accounting Officer and Chief Financial Officer of Validus Reinsurance, Ltd. Mr. Sangster has 20 years of experience in the reinsurance industry and was previously with Endurance, Centre Group and Ernst & Young. Mr. Sangster is Chartered Accountant and a member of the Chartered Professional Accountants of Bermuda and the Chartered Professional Accountants of Manitoba.

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Peter Bilsby currently serves as Global Head of Insurance and Chief Executive Officer of the Talbot Group. Prior to this, Mr. Bilsby served as Managing Director of Talbot. Mr. Bilsby joined Talbot as Head of Global Aerospace from XL London Market Ltd. in September 2009 and served as Director of Underwriting until his appointment as Managing Director in November 2013. Peter Bilsby has almost 30 years’ experience in the insurance market.
Patrick Boisvert was appointed Executive Vice President and Chief Accounting Officer of the Company in July 2016. Prior to his role, he was Managing Director & Chief Financial Officer of Validus Reinsurance (Switzerland) Ltd. Before joining Validus in 2013, Mr. Boisvert was Chief Financial Officer of Flagstone Reinsurance Holdings SA from 2008 to 2012 and Chief Accounting Officer and Treasurer from 2006 to 2008. Prior to joining Flagstone, he was Vice President Fund Administration for BISYS Hedge Fund Services. Mr. Boisvert began his career in 1995 with Ernst & Young in Montreal, Canada. He holds a Bachelor in Accounting from Université du Quebec à Trois-Rivieres, is a member of the C.F.A. Institute and a member of the Chartered Professional Accountants of Canada.
Kean D. Driscoll is the Global Head of Reinsurance, President of Validus Holdings, Ltd. and Chief Executive Officer of Validus Reinsurance, Ltd. He was a founding member of the Company, and previously served as Chief Underwriting Officer. Mr. Driscoll has over 20 years of experience as a reinsurance underwriter, and was previously with Quanta Re, and Zurich Re N.A. (Converium). Mr. Driscoll holds a B.A. in Literature from Colgate University and an M.B.A. from Columbia University, where he graduated with Honors.
John J. Hendrickson has been a director of the Company since its formation. In February 2013, Mr. Hendrickson joined Validus Group as Director of Strategy, Risk Management and Corporate Development. Prior to this, Mr. Hendrickson was the Founder and Managing Partner of SFRi LLC, an independent investment and advisory firm specializing in the insurance industry. From 1995 to 2004, Mr. Hendrickson held various positions with Swiss Re, including as Member of the Executive Board, Head of Capital Partners (Swiss Re’s Merchant Banking Division) and Managing Partner of Securitas Capital. From 1985 to 1995, Mr. Hendrickson was with Smith Barney, the U.S. investment banking firm. Mr. Hendrickson has also served as a director of (re)insurance companies, including serving as audit committee chair.
Andrew E. Kudera has served as Chief Actuary of the Company since January 2010. Previously, Mr. Kudera operated an independent actuarial consulting firm which served as corporate actuary and loss reserve specialist for Validus Reinsurance, Ltd. from its inception through to the end of 2008. Prior to establishing his own consulting firm, Mr. Kudera was the Chief Reserving Actuary for Endurance Specialty Holdings Ltd., a large international (re)insurance company. Mr. Kudera has over 35 years of actuarial and financial management experience in the insurance industry in both company and consulting capacities. Mr. Kudera is a Fellow of the Casualty Actuarial Society, a Member of the American Academy of Actuaries, an Associate of the Society of Actuaries, a Fellow of the Canadian Institute of Actuaries and a Fellow of the Institute of Actuaries.
Robert F. Kuzloski joined the company in January 2009 and served as Executive Vice President and Chief Corporate Legal Officer of the Company until August of 2012 when he was appointed Executive Vice President and General Counsel of the Company. Prior to joining the Company in January of 2009, Mr. Kuzloski served as Senior Vice President and Assistant General Counsel of XL Capital Ltd. Prior to that, Mr. Kuzloski worked as an attorney at the law firm of Cahill Gordon & Reindel LLP where he specialized in general corporate and securities law, mergers and acquisitions and corporate finance.
Michael R. Moore serves as Executive Vice President and Group Chief Operating Officer of the Company, a position he has held since May 2016, having previously held the position of Chief Accounting Officer since June 2013. Mr. Moore has over 20 years of experience, including 18 years in the (re)insurance industry. Prior to joining Validus, Mr. Moore served as a Senior Vice President, Corporate Operations at Axis Capital, Chief Accounting Officer at Endurance Specialty Holdings Ltd. and as a Senior Manager with Ernst & Young. Mr. Moore received a Bachelor of Commerce, with distinction, from the University of Alberta in 1993 and he is a Chartered Accountant and member of the Chartered Professional Accountants of Bermuda and Chartered Professional Accountants of Canada.
Jonathan P. Ritz serves as President of Western World Insurance Group, Inc. and Chief Executive Officer of Validus Specialty, having previously held the position of Chief Operating Officer since October 2010. Mr. Ritz has over 20 years of experience in the (re)insurance and brokerage industries. Most recently, Mr. Ritz served as Chief Operating Officer of IFG Companies-Burlington Insurance Group. Prior to IFG, Mr. Ritz served as Chief Operating Officer of the specialty lines division of ICAT Holdings LLC. From 2007 to 2008, Mr. Ritz was a Managing Director at Guy Carpenter and from 1997 to 2007 he held various positions with United America Insurance Group including Chief Operating Officer and Senior Vice President of ceded reinsurance.
Romel Salam serves as Executive Vice President and Chief Risk Officer of the Company, a position he has held since April 2013. He was promoted to his current role after serving for three years as Chief Actuary and Chief Risk Officer of Validus Reinsurance, Ltd, the reinsurance arm of Validus Group. Prior to joining the Company in 2010, Mr. Salam was a Senior Vice President at Transatlantic Reinsurance where he spent 20 years in positions of increasing responsibility. Mr. Salam is a Fellow of the Casualty of Actuarial Society and a Member of the American Academy of Actuaries.

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Lixin Zeng, Ph.D., CFA serves as Global Head of Asset Management and Chief Executive Officer of AlphaCat Managers Ltd. and has played a key role in the Manager since its formation in 2008. Prior to this role, he was Executive Risk Officer of Validus Reinsurance Ltd, responsible for developing and executing the catastrophe risk strategy of the entire Validus Group. Dr. Zeng was one of the original employees at the founding of Validus in 2005. His prior positions include: Chief Catastrophe Risk Officer at the ACE Group from 2004 to 2005, Head of Development at Willis Re Inc from 2001 to 2004, Analyst at EW Blanch Co. from 1998 to 2001 and Research Scientist at Arkwright Mutual Insurance Co from 1996 to 1998. Mr. Zeng has expertise in insurance portfolio optimization and risk management and has published multiple articles in professional journals on related topics. He has a Ph.D. in atmospheric sciences from the University of Washington where he graduated in 1996. He received a B.S. in Meteorology from Beijing University, graduating in 1990 and is a CFA charterholder.
Available Information
The Company files periodic reports, proxy statements and other information with the SEC. The public may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The SEC’s website address is http://www.sec.gov. The Company’s common shares are traded on the NYSE under the symbol “VR.” Similar information concerning the Company can be reviewed at the office of the NYSE at 20 Broad Street, New York, New York, 10005. The Company’s website address is http://www.validusholdings.com. Information contained in this website is not part of this report.
The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge, including through our website, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Copies of the charters for the audit committee, the compensation committee, the corporate governance and nominating committee, the finance committee and the risk committee, as well as the Company’s Corporate Governance Guidelines, Code of Business Conduct and Ethics for Directors, Officers and Employees (the “Code”), which applies to all of the Company’s Directors, officers and employees, and Code of Ethics for Senior Officers, which applies to the Company’s principal executive officer, principal accounting officer and other persons holding a comparable position, are available free of charge on the Company’s website at http://www.validusholdings.com or by writing to Investor Relations, Validus Holdings, Ltd., 29 Richmond Road, Pembroke, HM 08, Bermuda. The Company will also post on its website any amendment to the Code and any waiver of the Code granted to any of its directors or executive officers to the extent required by applicable rules.


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Item 1A.    Risk Factors
Risks Related to Our Company
Claims on policies written under our short-tail insurance lines that arise from unpredictable and severe catastrophic events could adversely affect our financial condition or results of operations.
The majority of our gross premiums written to date are in short-tail lines, many of which have the potential to accumulate, which means we could become liable for a significant amount of losses in a brief period. The short-tail policies we write expose us to claims arising out of unpredictable natural and other catastrophic events, whether arising from natural causes such as hurricanes, windstorms, tsunamis, severe winter weather, earthquakes and floods, or man-made causes such as fires, explosions, acts of terrorism, war or political unrest. Many observers believe that the Atlantic basin is in the active phase of a multi-decade cycle in which conditions in the ocean and atmosphere, including warmer-than-average sea-surface temperatures and low wind shear, enhance hurricane activity. This increase in the number and intensity of tropical storms and hurricanes can span multiple decades (approximately 20 to 30 years). These conditions may translate to a greater potential for hurricanes to make landfall in the U.S. at higher intensities over the next several years. In addition, climate change may be causing changes in global temperatures, which may in the future increase the frequency and severity of natural catastrophes and the losses resulting therefrom.
The extent of losses from catastrophes is a function of both the number and severity of the insured events and the total amount of insured exposure in the areas affected. Increases in the value and concentrations of insured property, the effects of inflation and changes in cyclical weather patterns may increase the severity of claims from natural catastrophic events in the future. Similarly, changes in global political and economic conditions may increase both the frequency and severity of man-made catastrophic events in the future. Claims from catastrophic events could reduce our earnings and cause substantial volatility in our results of operations for any fiscal quarter or year, which could adversely affect our financial condition, possibly to the extent of eliminating our shareholders’ equity. Our ability to write new reinsurance policies could also be affected as a result of corresponding reductions in our capital.
Underwriting is inherently a matter of judgment, involving important assumptions about matters that are unpredictable and beyond our control, and for which historical experience and probability analysis may not provide sufficient guidance. One or more catastrophic or other events could result in claims that substantially exceed our expectations and which would become due in a short period of time, which could materially adversely affect our financial condition, liquidity or results of operations.
Emerging claim and coverage issues could adversely affect our business.
As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until sometime after we have issued insurance or reinsurance contracts that are affected by the changes. For example, a (re)insurance contract might limit the amount that can be recovered as a result of flooding. However, if the flood damage was caused by an event that also caused extensive wind damage, the quantification of the two types of damage is often a matter of judgment. Similarly, one geographic zone could be affected by more than one catastrophic event. In this case, the amount recoverable from a (re)insurer may in part be determined by the judgmental allocation of damage between the events. Given the magnitude of the amounts at stake, these types of issues occasionally necessitate judicial resolution. In addition, our actual losses may vary materially from our current estimate of the loss based on a number of factors, including receipt of additional information from insureds or brokers, the attribution of losses to coverages that had not previously been considered as exposed and inflation in repair costs due to additional demand for labor and materials. As a result, the full extent of liability under a (re)insurance contract may not be known for many years after such contract is issued and a loss occurs. Our exposure to this uncertainty is greater in our specialty - other lines which are typically longer tail.
As a property and casualty (re)insurer, we could face losses from war, terrorism and political unrest.
We may have substantial exposure to losses resulting from acts of war, acts of terrorism and political instability. These risks are inherently unpredictable, although recent events may lead to increased frequency and severity. It is difficult to predict the occurrence of these perils with statistical certainty or to estimate the amount of loss an occurrence will generate. We closely monitor the amount and types of coverage we provide for terrorism risk under insurance policies and reinsurance treaties. We often seek to exclude terrorism when we cannot reasonably evaluate the risk of loss or charge an appropriate premium for such risk. Even in cases where we have deliberately sought to exclude coverage, we may not be able to eliminate our exposure to terrorist acts, and thus it is possible that these acts could have a material adverse effect on us.

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As an agriculture (re)insurer, we could face losses from commodity price volatility.
A significant portion of our agriculture (re)insurance business provides revenue protection to farmers for their expected crop revenues, which can be affected by changes in crop prices. We face the risk that significant losses could be incurred in the event of a decline in the applicable commodity prices prior to harvest. While this risk is partially mitigated by policyholder retentions, it is possible that large declines in the commodity prices of the major crops we (re)insure, including corn, soybeans, cotton and wheat, could have a material adverse effect on our results of operations or financial condition if we are unable to effectively (re)insure these risks.
The terms of the Federal Multi-Peril Crop Insurance Program may change and adversely impact us.
Stratford, a subsidiary of the Company, currently participates in the Federal MPCI program sponsored by the Risk Management Agency of the U.S. Department of Agriculture (the "RMA"). The U.S. Farm Bill was signed into law February 2014, which fixes the terms of the Federal MPCI program and is subject to change by the U.S. Congress at any time. Stratford's agriculture insurance premiums, which are primarily driven by the Federal MPCI program, represent a large portion of the Company’s business, totaling $232.5 million, or 18.5% of the total net premiums earned in the Insurance segment during the year ended December 31, 2017.
The RMA periodically reviews and proposes changes to the Standard Reinsurance Agreement (“SRA”) used in connection with the Federal MPCI program and such changes to the SRA could adversely affect the financial results of crop insurers such as Stratford.
We depend on ratings from third party rating agencies. Our financial strength rating could be revised downward, which could affect our standing among brokers and customers, cause our premiums and earnings to decrease and limit our ability to pay dividends on our common shares.
Third-party rating agencies assess and rate the financial strength of (re)insurers based upon criteria established by the rating agencies, which criteria are subject to change. The financial strength ratings assigned by rating agencies to (re)insurance companies represent independent opinions of financial strength and ability to meet policyholder obligations and are not directed toward the protection of investors. Ratings have become an increasingly important factor in establishing the competitive position of (re)insurance companies. Insurers and intermediaries use these ratings as one measure by which to assess the financial strength and quality of insurers and reinsurers. These ratings are often a key factor in the decision by an insured or intermediary of whether to place business with a particular insurance or reinsurance provider. These ratings are not an evaluation directed toward the protection of investors or a recommendation to buy, sell or hold our common shares.
If our financial strength rating is reduced from current levels, our competitive position in the (re)insurance industry could suffer, and it would be more difficult for us to market our products. A downgrade could result in a significant reduction in the number of (re)insurance contracts we write as our customers and brokers that place such business, move to other competitors with higher financial strength ratings.
The substantial majority of reinsurance contracts issued through reinsurance brokers contain provisions permitting the ceding company to cancel such contracts in the event of a downgrade of the reinsurer by A.M. Best below “A-” (Excellent). We cannot predict in advance the extent to which this cancellation right would be exercised, if at all, or what effect any such cancellations would have on our financial condition or future operations, but such effect could be material and adverse. Consequently, substantially all of the Reinsurance segment’s business could be affected by a downgrade of our reinsurance subsidiaries’ A.M. Best ratings below “A-”.
The indenture governing our Junior Subordinated Deferrable Debentures would restrict us from declaring or paying dividends on our common shares if we are downgraded by A.M. Best to a financial strength rating of “B” (Fair) or below or if A.M. Best withdraws its financial strength rating on any of our material insurance subsidiaries. A downgrade of the Company’s A.M. Best financial strength rating below “B++” (Fair) would also constitute an event of default under our credit facilities. Either of these events could, among other things, reduce the Company’s financial flexibility.
If our risk management and loss limitation methods fail to adequately manage exposure to losses from catastrophic events, our financial condition and results of operations could be adversely affected.
We manage exposure to catastrophic losses by analyzing the probability and severity of the occurrence of catastrophic events and the impact of such events on our overall (re)insurance and investment portfolio. We use various tools to analyze and manage the reinsurance exposures assumed from insureds and ceding companies and risks from a catastrophic event that could have an adverse effect on our investment portfolio. VCAPS, our proprietary risk modeling software, enables us to assess the adequacy of reinsurance risk pricing and to monitor the overall exposure to (re)insurance risk in correlated geographic zones. There can be no assurance that the models and assumptions used by the software will accurately predict losses. Further, there can be no assurance that the models are free of defects in the modeling logic or in the software code. In addition, we have not sought copyright or other legal protection for VCAPS.

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In addition, much of the information that we enter into the risk modeling software is based on third-party data that may not be reliable, as well as estimates and assumptions that are dependent on many variables, such as assumptions about building material and labor demand surge, storm surge, the expenses of settling claims, insurance-to-value and storm intensity. Accordingly, if the estimates and assumptions that are entered into the proprietary risk model are incorrect, or if the proprietary risk model proves to be an inaccurate forecasting tool, the losses we might incur from an actual catastrophe could be materially higher than the expectation of losses generated from modeled catastrophe scenarios, and our financial condition and results of operations could be adversely affected.
A modeled outcome of net loss from a single event also relies in significant part on the reinsurance and retrocessional arrangements in place, or expected to be in place at the time of the analysis, and may change during the year. Modeled outcomes assume that the reinsurance in place responds as expected with minimal reinsurance failure or dispute. Reinsurance and retrocessional coverage is purchased to protect the inwards exposure in line with our risk appetite, but it is possible for there to be a mismatch or gap in cover which could result in higher than modeled losses. In addition, many parts of our reinsurance program are purchased with limited reinstatements and, therefore, the number of claims or events which may be recovered from second or subsequent events is limited. It should also be noted that renewal dates of the reinsurance and retrocessional program do not necessarily coincide with those of the inwards business written. Where inwards business is not protected by risks attaching reinsurance and retrocessional programs, the programs could expire resulting in an increase in the possible net loss retained and as such, could have a material adverse effect on our financial condition and results of operations.
We also seek to limit loss exposure through loss limitation provisions in policies we write, such as limitations on the amount of losses that can be claimed under a policy, limitations or exclusions from coverage and provisions relating to choice of forum, which are intended to assure that our policies are legally interpreted as intended. There can be no assurance that these contractual provisions will be enforceable in the manner expected or that disputes relating to coverage will be resolved in our favor. If the loss limitation provisions in the policies are not enforceable or disputes arise concerning the application of such provisions, the losses we incur from a catastrophic event could be materially higher than expected and our financial condition and results of operations could be adversely affected.
The (re)insurance business is historically cyclical and we expect to experience periods with excess underwriting capacity and unfavorable premium rates and policy terms and conditions, which could materially adversely affect our financial condition and results of operations.
The (re)insurance industry has historically been cyclical. (Re)insurers have experienced significant fluctuations in operating results due to competition, frequency of occurrence or severity of catastrophic events, levels of underwriting capacity, underwriting results of primary insurers, general economic conditions and other factors. The supply of (re)insurance is related to prevailing prices, the level of insured losses and the level of industry surplus which, in turn, may fluctuate, including in response to changes in rates of return on investments being earned in the reinsurance industry.
The (re)insurance pricing cycle has historically been a market phenomenon, driven by supply and demand rather than by the actual cost of coverage. The upward phase of a cycle is often triggered when a major event forces (re)insurers to make large claim payments, thereby drawing down capital. This, combined with increased demand for insurance against the risk associated with the event, pushes prices upwards. Over time (re)insurers’ capital is replenished with the higher revenues. At the same time, new entrants flock to the industry seeking a part of the profitable business. This combination prompts a slide in prices—the downward cycle—until a major insured event potentially restarts the upward phase. As a result, the (re)insurance business has been characterized by periods of intense competition on price and policy terms due to excessive underwriting capacity, which is the percentage of surplus or the dollar amount of exposure that a reinsurer is willing to place at risk, as well as periods when shortages of capacity result in favorable premium rates and policy terms and conditions.
Premium levels may be adversely affected by a number of factors which fluctuate and may contribute to price declines generally in the reinsurance industry. For example, as premium levels for many products increased subsequent to the significant natural catastrophes of 2004 and 2005, the supply of reinsurance increased, either as a result of capital provided by new entrants or by the commitment of additional capital by existing reinsurers. Increases in the supply of (re)insurance may have consequences for the reinsurance industry generally and for us including fewer contracts written, lower premium rates, increased expenses for customer acquisition and retention, and less favorable policy terms and conditions. As a consequence, the Company will experience greater competition on most (re)insurance lines. This could adversely affect the rates we receive for our (re)insurance and our gross premiums written. The (re)insurance industry is currently experiencing a soft market whereby premiums tend to be lower, capacity is higher and competition increases.
The cyclical trends in the industry and the industry’s profitability can also be affected significantly by volatile and unpredictable developments, such as natural disasters (e.g., catastrophic hurricanes, windstorms, tornadoes, earthquakes and floods), courts granting large awards for certain damages, fluctuations in interest rates, changes in the investment environment that affect market prices of investments and inflationary pressures that may tend to affect the size of losses experienced by insureds and primary insurance

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companies. We expect to experience the effects of cyclicality, which could materially adversely affect our financial condition and results of operations.
Competition for business in our industry is intense, and if we are unable to compete effectively, we may not be able to retain market share and our business may be materially adversely affected.
The (re)insurance industries are highly competitive. We face intense competition, based upon (among other things) global capacity, product breadth, reputation and experience with respect to particular lines of business, relationships with (re)insurance intermediaries, quality of service, capital and perceived financial strength (including independent rating agencies’ ratings), innovation and price. We compete with major global (re)insurance companies and underwriting syndicates, many of which have extensive experience in (re)insurance and may have greater financial, marketing and employee resources available to them than us. Other financial institutions, such as banks and hedge funds, now offer products and services similar to our products and services through alternative capital markets products that are structured to provide protections similar to those provided by reinsurers. These products, such as catastrophe-linked bonds, compete with our products. In the future, underwriting capacity will continue to enter the market from these identified competitors and perhaps other sources. Increased competition could result in fewer submissions and lower rates, which could have a material adverse effect on our growth and profitability. If we are unable to compete effectively against these competitors, we may not be able to retain market share and this could adversely affect our financial condition and results of operations.
In addition, insureds have been retaining a greater proportion of their risk portfolios than previously, and industrial and commercial companies have been increasingly relying upon their own subsidiary insurance companies, known as captive insurance companies, self-insurance pools, risk retention groups, mutual insurance companies and other mechanisms for funding their risks, rather than risk transferring insurance. This has also put downward pressure on (re)insurance premiums.
Consolidation in the (re)insurance industry could adversely affect our business.
We believe that several (re)insurance industry participants are seeking to consolidate. These consolidated entities may try to use their enhanced market power to negotiate price reductions for our products and services and/or obtain a larger market share through increased line sizes. If competitive pressures reduce our prices, we would expect to write less business. As the (re)insurance industry consolidates, competition for customers will become more intense and the importance of acquiring and properly servicing each customer will become greater. We could incur greater expenses relating to customer acquisition and retention, further reducing our operating margins. In addition, insurance companies that merge may be able to spread their risks across a consolidated, larger capital base so that they require less reinsurance. Reinsurance intermediaries could also continue to consolidate, potentially adversely impacting our ability to access business and distribute our products. We could also experience more robust competition from larger, better capitalized competitors. Any of the foregoing could adversely affect our business or our results of operations.
If we underestimate our reserve for losses and loss expenses, our financial condition and results of operations could be adversely affected.
Our success depends on our ability to accurately assess the risks associated with the businesses and properties that we insure/reinsure. If unpredictable catastrophic events occur, or if we fail to adequately manage our exposure to losses or fail to adequately estimate our reserve requirements, our actual losses and loss expenses may deviate, perhaps substantially, from our reserve estimates.
We estimate the risks associated with our outstanding obligations, including the risk embedded within our unearned premiums. To do this, we establish reserves for losses and loss expenses (or loss reserves), which are liabilities that we record to reflect the estimated costs of claim payment and the related expenses that we will ultimately be required to pay in respect of premiums written and include case reserves and IBNR reserves. However, under U.S. GAAP, we are not permitted to establish reserves for losses until an event which gives rise to a claim occurs. As a result, only reserves applicable to losses incurred up to the reporting date may be set aside on our financial statements, with no allowance for the provision of loss reserves to account for possible other future losses, unless we deem the unearned premium reserve to be insufficient to cover future losses on risks that have already incepted. Case reserves are reserves established with respect to specific individual reported claims. IBNR reserves are reserves for estimated losses that we have incurred but that have not yet been reported to us.
Our reserve estimates do not represent an exact calculation of liability. Rather, they are estimates of what we expect the ultimate settlement and administration of claims will cost. These estimates are based upon actuarial and statistical projections, on our assessment of currently available data, predictions of future developments and estimates of future trends and other variable factors such as inflation. Establishing an appropriate level for our loss reserve estimates is an inherently uncertain process. It is likely that the ultimate liability will be greater or less than these estimates and that, at times, this variance will be material. Our reserve estimates are regularly refined as experience develops and claims are reported and settled. In addition, as we operate largely through intermediaries, reserving for our business can involve added uncertainty arising from our dependence on information from ceding companies which, in addition to the risk of receiving inaccurate information, involves an inherent time lag between reporting information from the primary insurer to us. Additionally, ceding companies employ differing reserving practices which add further uncertainty to the establishment of our reserves. Moreover, in certain circumstances, the Company has necessitated the use of industry loss emergence patterns in deriving

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IBNR. Loss emergence patterns are development patterns used to project current reported or paid loss amounts to their ultimate settlement value or amount. Further, expected losses and loss ratios are typically developed using vendor and proprietary computer models and these expected loss ratios are a material component in the calculation of IBNR. Actual loss ratios will deviate from expected loss ratios and ultimate loss ratios will be greater or less than expected loss ratios. Because of these uncertainties, it is possible that our estimates for reserves at any given time could prove inadequate.
To the extent we determine that actual losses and loss expenses from events which have occurred exceed our expectations and the loss reserves reflected in our financial statements, we will be required to reflect these changes in the current reporting period. This could cause a sudden and material increase in our liabilities and a reduction in our profitability, including operating losses and reduction of capital, which could materially restrict our ability to write new business and adversely affect our financial condition and results of operations and potentially our A.M. Best rating.
The preparation of our financial statements requires us to make many estimates and judgments which, if inaccurate, could cause volatility in our results.
Our Consolidated Financial Statements have been prepared in accordance with U.S. GAAP. Management believes the item that requires the most subjective and complex estimates is the reserve for losses and loss expenses. Following a major catastrophic event, the possibility of future litigation or legislative change that may affect interpretation of policy terms further increases the degree of uncertainty in the reserving process. The uncertainties inherent in the reserving process, together with the potential for unforeseen developments, including changes in laws and the prevailing interpretation of policy terms, may result in losses and loss expenses materially different than the reserves initially established. Changes to prior year reserves will affect current underwriting results by increasing net income if the prior year reserves prove to be redundant or by decreasing net income if the prior year reserves prove to be insufficient. We expect volatility in results in periods in which significant loss events occur because U.S. GAAP does not permit insurers or reinsurers to reserve for loss events until they have occurred and are expected to give rise to a claim. As a result, we are not allowed to record contingency reserves to account for expected future losses. We anticipate that claims arising from future events will require the establishment of substantial reserves from time to time.
Changes in current accounting practices and future pronouncements could materially impact our reported financial results.
Unanticipated developments in accounting practices may require us to divert resources from other operational roles to comply with such developments, particularly if we are required to prepare information relating to prior periods for comparative purposes or significantly modify existing processes to apply the new requirements prospectively. The impact of changes in current accounting practices and future pronouncements cannot be predicted; however, they may affect the calculation of net income, net equity and other relevant financial statement line items.
We rely on key personnel and the loss of their services may adversely affect us. The Bermuda location of our head office may be an impediment to attracting and retaining experienced personnel.
Various aspects of our business depend on the services and skills of key personnel of the Company. We believe there are only a limited number of available qualified executives in the business lines in which we compete. We rely substantially upon the services of our executive officers, among other key employees of the Company. For a listing of our executive officers refer to Part I, Item 1 “Business.” The loss of any of their services or the services of other members of our management team or any difficulty in attracting and retaining other talented personnel could impede the further implementation of our business strategy, reduce our revenues and decrease our operational effectiveness. Although we have an employment agreement with each of our executive officers, there is a possibility that these employment agreements may not be enforceable in the event any of these employees leave. The employment agreements for each of our executive officers provide that the terms of the agreement will continue for a defined period after either party giving notice of termination, and will terminate immediately upon the Company giving notice of termination for cause. We do not currently maintain key man life insurance policies with respect to these or any of our other employees. In addition, changes in employment laws, taxation and remuneration practices within our operating jurisdiction may adversely impact the retention or recruitment of key personnel.
The operating location of our head office and our primary reinsurance subsidiary may be an impediment to attracting and retaining experienced personnel. Under Bermuda law, non-Bermudians (other than spouses of Bermudians or permanent resident certificate holders) may not engage in any gainful occupation in Bermuda without an appropriate governmental work permit. Our success may depend in part on the continued services of key employees in Bermuda. A work permit may be granted or renewed upon demonstrating that, after proper public advertisement, no Bermudian (or spouse of a Bermudian or a holder of a permanent resident’s certificate) is available who meets the minimum standards reasonably required by the employer. A work permit is issued with an expiry date (up to ten years for senior executives) and no assurances can be given that any work permit will be issued or, if issued, renewed upon the expiration of the relevant term. If work permits are not obtained, or are not renewed, for our principal employees, we would lose their services, which could materially affect our business. Work permits are currently required for 44 of our Bermuda employees, the majority of whom have obtained three- or five-year work permits.

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Certain of our directors and officers may have conflicts of interest with us.
Entities affiliated with some of our directors have sponsored or invested in, and may in the future sponsor or invest in, other entities engaged in or intending to engage in (re)insurance underwriting, some of which compete with us. They have also entered into, or may in the future enter into, agreements with companies that compete with us.
We have a policy in place applicable to each of our directors and officers which provides for the resolution of potential conflicts of interest. However, we may not be in a position to influence any party’s decision to engage in activities that would give rise to a conflict of interest, and they may take actions that are not in our shareholders’ best interests.
We may require additional capital or credit in the future, which may not be available or only available on unfavorable terms.
We monitor our capital adequacy on a regular basis. The capital requirements of our business depend on many factors, including our premiums written, loss reserves, investment portfolio composition and risk exposures, as well as satisfying regulatory and rating agency capital requirements. Our ability to underwrite is largely dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. To the extent that our existing capital is insufficient to fund our future operating requirements and/or cover claim losses, we may need to raise additional funds through financings or limit our growth. Any equity or debt financing, if available at all, may be on terms that are unfavorable to us. In the case of equity financings, dilution to our shareholders could result, and, in any case, such securities may have rights, preferences and privileges that are senior to those of our outstanding securities. In addition, the capital and credit markets have recently been experiencing extreme volatility and disruption. In some cases, the markets have exerted downward pressure on the availability of liquidity and credit capacity for certain issuers. If we are not able to obtain adequate capital, our business, results of operations and financial condition could be adversely affected.
In addition, for certain of our subsidiaries as an alien insurer and reinsurer (not licensed in the U.S.), we are required to post collateral security with respect to any (re)insurance liabilities that we assume from insureds or ceding insurers domiciled in the U.S. in order for U.S. ceding companies to obtain full statutory and regulatory credit for our reinsurance. Other jurisdictions may have similar collateral requirements. Under applicable statutory provisions, these security arrangements may be in the form of letters of credit, insurance or reinsurance trusts maintained by trustees or funds-withheld arrangements where assets are held by the ceding company. We intend to satisfy such statutory requirements by maintaining the trust fund requirements for the Talbot Syndicate’s underwriting at Lloyd’s and by providing Validus Re and Validus Re Swiss’ primary insurers letters of credit issued under our credit facilities or access to our multi-beneficiary trusts. To the extent that we are required to post additional security in the future, we may require additional letter of credit capacity and there can be no assurance that we will be able to obtain such additional capacity or arrange for other types of security on commercially acceptable terms or on terms as favorable as under our current letter of credit facilities. Our inability to provide collateral satisfying the statutory and regulatory guidelines applicable to insureds and primary insurers would have a material adverse effect on our ability to provide (re)insurance to third parties and negatively affect our financial position and results of operations.
Security arrangements may subject our assets to security interests and/or require that a portion of our assets be pledged to, or otherwise held by, third parties. Although the investment income derived from our assets while held in trust typically accrues to our benefit, the investment of these assets is governed by the investment regulations of the state of domicile of the ceding insurer and therefore the investment returns on these assets may not be as high as they otherwise would be.
We may be adversely impacted by inflation.
Our operations, like those of other property and casualty (re)insurers, are susceptible to the effects of inflation because premiums are established before the ultimate amounts of loss and loss expense are known. Although we consider the potential effects of inflation when setting premium rates, our premiums may not fully offset the effects of inflation and essentially result in our underpricing the risks we insure and reinsure. Our reserve for losses and loss expenses includes assumptions about future payments for settlement of claims and claims handling expenses, such as the value of replacing property and associated labor costs for the property business we write, the value of medical treatments and litigation costs. To the extent inflation causes these costs to increase above reserves established for these claims, we will be required to increase our loss reserves with a corresponding reduction in our net income in the period in which the deficiency is identified, which may have a material adverse effect on our financial condition or results of operations.
Loss of business from one or more major brokers could adversely affect us.
We market our (re)insurance on a worldwide basis primarily through brokers, and we depend on a small number of brokers for a large portion of our revenues. For the year ended December 31, 2017, our business was primarily sourced from the following brokers: Marsh & McLennan Companies, Inc. 24.6%, Aon Benfield Group Ltd. 16.3%, and Willis Towers Watson plc 12.1%. These three brokers provided a total of 53.0% of our gross premiums written for the year ended December 31, 2017. Loss of all or a substantial portion of the business provided by one or more of these brokers could adversely affect our business.

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We assume a degree of credit risk associated with substantially all of our brokers.
In accordance with industry practice, we frequently pay amounts owed on claims under our policies to brokers and the brokers, in turn, pay these amounts over to the insured and reassured that have reinsured a portion of their liabilities with us. In some jurisdictions, if a broker fails to make such a payment, we might remain liable to the insured or reassured for the deficiency notwithstanding the broker’s obligation to make such payment. Conversely, in certain jurisdictions, when the insured or reassured pays premiums for these policies to the (re)insurance brokers for payment to us, these premiums are considered to have been paid and the insured or reassured will no longer be liable to us for these premiums, whether or not we have actually received them. Consequently, we assume a degree of credit risk associated with substantially all of our brokers.
Our utilization of brokers, managing general agents and other third parties to support our business exposes us to operational and financial risks.
Our insurance business relies upon brokers, managing general agents and other third parties to produce and service a portion of its operations. In these arrangements, we typically grant the third party the right to bind us to new and renewal policies, subject to underwriting guidelines we provide and other contractual restrictions and obligations. Should these third parties issue policies that contravene these guidelines, restrictions or obligations, we could nonetheless be deemed liable for such policies. Although we would intend to resist claims that exceed or expand on our underwriting intention, it is possible that we would not prevail in such an action, or that our managing general agent would be unable to adequately indemnify us for their contractual breach.
We also rely on managing general agents, third party administrators or other third parties we retain, to collect premiums and to pay valid claims. We could also be exposed to their or their producer’s operational risk, including, but not limited to, contract wording errors, technological and staffing deficiencies and inadequate disaster recovery plans. We could also be exposed to potential liabilities relating to the claims practices of the third party administrators we have retained to manage the claims activity on this business. Although we have implemented monitoring and other oversight protocols, we cannot assure that these measures will be sufficient to mitigate all of these exposures.
Our success depends on our ability to establish and maintain effective operating procedures and internal controls. Failure to detect control issues and any instances of fraud could adversely affect us.
Our success is dependent upon our ability to establish and maintain operating procedures and internal controls (including the timely and successful implementation of information technology systems and programs) to effectively support our business and our regulatory and reporting requirements. We may not be successful in such efforts. Even when implemented, as a result of the inherent limitations in all control systems, no evaluation of controls can provide full assurance that all control issues and instances of fraud, if any, within the Company will be detected.
We may be unable to purchase reinsurance or retrocessional reinsurance in the future, and if we do successfully purchase reinsurance or retrocessional reinsurance, we may be unable to collect on claims submitted under such policies, which could adversely affect our business, financial condition and results of operations.
We purchase reinsurance and retrocessional reinsurance in order that we may offer insureds and cedants greater capacity, and to mitigate the effect of large and multiple losses on our financial condition. Reinsurance is a transaction whereby an insurer or reinsurer cedes to a reinsurer or retrocessional reinsurer all or part of the insurance it has written or reinsurance it has assumed. A reinsurer’s or retrocessional reinsurer’s insolvency or inability or refusal to make timely payments under the terms of its reinsurance agreement with us could have an adverse effect on us because we remain liable to our client. From time to time, market conditions have limited, and in some cases have prevented, insurers and reinsurers from obtaining the types and amounts of reinsurance or retrocessional reinsurance that they consider adequate for their business needs. Accordingly, we may not be able to obtain our desired amounts of reinsurance or retrocessional reinsurance or negotiate terms that we deem appropriate or acceptable or obtain reinsurance or retrocessional reinsurance from entities with satisfactory creditworthiness.
Our investment portfolio may suffer reduced returns or losses which could adversely affect our results of operations and financial condition. Any increase in interest rates or volatility in the fixed income markets could result in significant unrealized losses in the fair value of our investment portfolio which would reduce our net income.
Our operating results depend in part on the performance of our investment portfolio, which currently consists largely of fixed maturity securities, as well as the ability of our investment managers to effectively implement our investment strategy. Our Chief Investment Officer and Chief Financial Officer oversee our investment strategy and have established the Company's IPS which provides the framework for the management and oversight of the Company’s investment portfolio and is approved by our Finance Committee and Board of Directors. Refer to Part I, Item 1 “Business - Investment Management” for further details on the Company’s IPS.
While we follow a conservative investment strategy designed to emphasize the preservation of invested assets and to provide sufficient liquidity for the prompt payment of claims, we will nevertheless be subject to market-wide risks including illiquidity and pricing uncertainty and fluctuations, as well as to risks inherent in particular securities. Our investment performance may vary

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substantially over time, and there can be no assurance that we will achieve our investment objectives. The investment return including managed net investment income, income (loss) from investment affiliates, net realized and the change in net unrealized gains (losses) on managed cash and investments was $188.8 million, or 2.78% for the year ended December 31, 2017.
Investment results will also be affected by general economic conditions, market volatility, interest rate fluctuations, liquidity and credit risks beyond our control. In addition, our need for liquidity may result in investment returns below our expectations. Also, with respect to certain of our investments, we are subject to prepayment or reinvestment risk. At December 31, 2017, 35.3% of our managed fixed maturities portfolio is comprised of mortgage-backed and asset-backed securities which are subject to prepayment risk. Although we attempt to manage the risks of investing in a changing interest rate environment, a significant increase in interest rates could result in significant losses, realized or unrealized, in the fair value of our investment portfolio and, consequently, could have an adverse effect on our results of operations.
A portion of our investment portfolio is allocated to investments which have risk characteristics different from our short-term and fixed maturity investment portfolio which could adversely affect our results of operations, financial condition and cash flows.
A portion of our investment portfolio is allocated to hedge funds, fixed income investment funds and private equity investments, including our investments in investment affiliates, which contain risk characteristics different from our short-term and fixed maturity investment portfolio. These investments expose us to market risk and may experience significant volatility in their investment returns and valuations which could have an adverse impact our results of operations and financial condition. Furthermore, certain of these investments also expose us to liquidity risk and may be illiquid due to contractual provisions or market conditions. If we require significant amounts of cash on short notice in excess of anticipated cash obligations, then we may have difficulty selling these investments in a timely manner or we may be forced to sell or terminate them at unfavorable values which could adversely impact our results of operations, financial condition and cash flows.
Investment methodologies and assumptions are subject to differing interpretations which could adversely affect our results of operations and financial condition.
The valuation of our investments may include methodologies, estimations and assumptions that are subject to differing interpretations and could result in changes to our investment valuations. During periods of market disruptions, it may be difficult to value certain securities if trading becomes less frequent or market data less observable. There may also be certain asset classes that become illiquid due to the financial environment. As a result, valuation of securities in our investment portfolio may require more subjectivity and management judgment. Valuation methods that require greater estimation may result in values which may be greater or less than the value at which the investments may be ultimately sold. In addition, rapidly changing and unpredictable credit and equity market conditions could materially affect the valuation of securities as reported in our Consolidated Financial Statements.
Our operating results may be adversely affected by currency fluctuations.
Our reporting currency is the U.S. dollar and the majority of our operating companies have a functional currency of the U.S. dollar. Many of our companies maintain both assets and liabilities in local currencies. Therefore, we are exposed to foreign exchange risk on the assets and liabilities denominated in those foreign currencies. Foreign exchange risk is reviewed as part of our risk management process. Locally required capital levels may be invested in home currencies in order to satisfy regulatory requirements and to support local insurance operations. The principal currencies potentially creating unhedged foreign exchange risk are the Canadian dollar, Australian dollar, New Zealand dollar, Japanese yen, British pound sterling and the Euro. As a result of the accounting treatment for non-monetary items, we may experience volatility in our income statement during a period when movement in foreign exchange rates fluctuate significantly. In accordance with U.S. GAAP, non-monetary items are not re-measured at the reporting date and are therefore translated at historic exchange rates. Non-monetary items include unearned premiums and deferred acquisition costs. Therefore, a mismatch arises in the income statement between the amount of premium recognized at historical exchange rates and the related claims which are re-measured using currency rates at the reporting date which can cause volatility in the income statement. We look to manage our economic foreign currency exposure through matching our major foreign-denominated assets and liabilities, as well as through the use of currency derivatives. However, there is no guarantee that we will effectively mitigate our exposure to foreign exchange losses. Refer to Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” for further discussion of foreign currency risk.
System security risks, data protection breaches, cyber-attacks and systems integration issues could disrupt our internal operations or information technology services provided to customers, and any such disruption could affect our ability to conduct our business, our financial condition and our ability to meet the demands of our customers and stakeholders.
We depend on the proper functioning and availability of our information technology platform, including communications and data processing systems, in operating our business. These systems consist of proprietary software programs that are integral to the efficient operation of our business and include our pricing and exposure management system, VCAPS, and other non-proprietary systems such as our policy administration, actuarial and accounting systems. A prolonged failure of, or inability to access, one or more of our operational systems could significantly impair our ability to process premiums and claims, pay claims, perform actuarial

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modeling, prepare internal and external financial statements and information, as well as conduct other daily business activities. Such failure could have a material adverse effect on our results of operations.
We are also required to effect electronic transmissions with third parties including brokers, client’s vendors and others with whom we do business, and to facilitate the oversight conducted by our Board of Directors. Security breaches arising from cyber-attacks could expose us to a risk of loss or misuse of our information, litigation and potential liability and could impact the availability, reliability, speed, accuracy or other proper functioning of our IT systems. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks. A significant cyber incident, including system failure, security breach, disruption by malware or other damage could interrupt or delay our operations, result in a violation of applicable privacy and other laws, damage our reputation, cause a loss of customers or give rise to monetary fines and other penalties, which could be significant.
The Company has a Business Continuity Program which has been developed to provide reasonable assurance of business continuity in the event of disruptions at the company’s critical facilities. The key elements of the program are business recovery, systems and data recovery. In the area of information security, we have developed and implemented a framework of principles, policies and technology to protect the information provided to us by our clients and that of the company from cyber-attacks and other misappropriation, corruption or loss. Safeguards are applied to maintain the confidentiality, integrity and availability of information; however, there is no guarantee that these measures will be sufficient to mitigate all of these exposures.
We may be exposed to risk in connection with our management of third party capital.
Our operating subsidiaries may owe certain legal duties and obligations to third party investors (including reporting obligations) and are subject to a variety of often complex laws and regulations relating to the management of third party capital. Compliance with some of these laws and regulations requires significant management time and attention. Although we seek to continually monitor our policies and procedures to attempt to ensure compliance, there could be faulty judgments, simple errors or mistakes, or the failure of our personnel to adhere to established policies and procedures that could result in our failure to comply with applicable laws or regulations which could result in significant liabilities, penalties or other losses to the Company, and seriously harm our business and results of operations. In addition to the forgoing, our third party capital providers may redeem their interests in our managed funds, which could materially impact the financial condition of such funds, and could in turn materially impact our financial condition and results of operations. Moreover, we can provide no assurance that we will be able to attract and raise additional third party capital for our existing funds or for potential new funds and therefore we may forego existing and/or potential fee income and other income generating opportunities.
The ongoing development of our U.S. excess and surplus lines insurance operations is subject to increased risk from changing market conditions.
Excess and surplus lines insurance is a substantial portion of the business written by our U.S.-based insurance companies. Excess and surplus lines insurance covers risks that are typically more complex and unusual than standard risks and require a high degree of specialized underwriting. As a result, excess and surplus lines risks do not often fit the underwriting criteria of standard insurance carriers. Our excess and surplus lines insurance business fills the insurance needs of businesses with unique characteristics and is generally considered higher risk than those in the standard market. If our underwriting staff inadequately judges and prices the risks associated with the business underwritten in the excess and surplus lines market, our financial results could be adversely impacted.
Further, the excess and surplus lines market is significantly affected by the conditions of the property and casualty insurance market in general. The impact of this cyclicality can be more pronounced in the excess and surplus market than in the standard insurance market. During times of hard market conditions (when market conditions are more favorable to insurers), as rates increase and coverage terms become more restrictive, business tends to move from the admitted market to the excess and surplus lines market and growth in the excess and surplus market can be significantly more rapid than growth in the standard insurance market. When soft market conditions are prevalent (when market conditions are less favorable to insurers), standard insurance carriers tend to loosen underwriting standards and expand market share by moving into business lines traditionally characterized as excess and surplus lines, exacerbating the effect of rate decreases. If we fail to manage the cyclical nature and volatility of the revenues and profit we generate in the excess and surplus lines market, our financial results could be adversely impacted.

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A decrease in the fair value of the Company’s reporting units and/or our intangible assets may result in future impairments.
Goodwill and intangible assets are assessed for impairment on an annual basis or more frequently if events or changes in circumstances indicate that their carrying values exceed their fair values. These assessments require us to use significant judgment in making various estimates and assumptions, regarding our expected future cash flows and actual results may ultimately be materially different from such estimates and assumptions. For example, expected future cash flows may be materially and adversely impacted as a result of, among other things, a decrease in renewals and new business, loss of key personnel, lower-than-expected yields from our investment portfolio or higher-than-expected claims activity and incurred losses as well as other general economic factors. As a result of these potential changes, the estimated fair value of the Company’s reporting units and/or our intangible assets may decrease, causing the carrying value to exceed the fair value and the goodwill and/or intangible assets to be impaired. If an impairment is determined to exist, the carrying value of the goodwill and/or intangible asset is adjusted to its implied fair value with the corresponding expense recorded in earnings in the period in which the impairment is determined. If we are required to record goodwill impairments in the future, our financial condition and results of operations would be negatively affected.
Risks Related to Acquisitions and New Ventures
Any future acquisitions or new ventures may expose us to operational risks.
We may in the future make strategic acquisitions, either of other companies or selected books of business, or grow our business organically. Any future acquisitions or new ventures may expose us to operational challenges and risks, including:
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integrating financial and operational reporting systems;
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integration into new geographical regions;
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establishing satisfactory budgetary and other financial controls;
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funding increased capital needs and overhead expenses;
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retaining management personnel required for existing operations;
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obtaining management personnel required for expanded operations;
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obtaining necessary regulatory permissions;
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funding cash flow shortages that may occur if anticipated revenues are not realized or are delayed, whether by general economic or market conditions or unforeseen internal difficulties;
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the value of assets related to acquisitions or new ventures may be lower than expected or may diminish due to credit defaults or changes in interest rates and liabilities assumed may be greater than expected;
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the assets and liabilities related to acquisitions or new ventures may be subject to foreign currency exchange rate fluctuation; and
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financial exposures in the event that the sellers of the entities we acquire are unable or unwilling to meet their indemnification, reinsurance and other obligations to us.
Our failure to manage successfully these operational challenges and risks may adversely impact our results of operations.
Risks Related to the Merger
Our proposed Merger with AIG may present certain risks to our business and operations.
The announcement and pendency of the proposed Merger with AIG could present certain risks to our business and operations, including, among other things, risks that:
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our operations will be restricted by the terms of the Merger Agreement, which may prevent or delay the pursuit of strategic corporate or business opportunities and result in our inability to respond effectively and/or timely to competitive pressures and industry developments;
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the proposed Merger may disrupt our current business plans and operations;
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our management's attention may be directed toward the completion of the Merger and diverted away from our day-to-day business operations and the execution of our current business plans;
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current and prospective employees may experience uncertainty about their future roles with us, which might adversely affect our ability to attract and retain employees who generate and service our business;
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uncertainties surrounding our business could cause brokers, customers and other counterparties to change existing business relationships, which could negatively affect our revenues, earnings and cash flow;

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•
third-party rating agencies may downgrade or revoke our financial strength or debt ratings in connection with the Merger;
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we may incur significantly higher transaction costs than we currently anticipate, such as legal, financing and accounting fees, and other costs, fees, expenses and charges related to the Merger, whether or not the Merger is completed;
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we could be subject to litigation related to the proposed Merger, which could result in significant costs and expenses; and
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the Merger may not be completed, which may have an adverse effect on our stock price to the extent that the current market price reflects a market assumption that the Merger will be completed, result in negative reactions from our shareholders and other investors, rating agencies, employees, brokers or customers, and adversely affect our future business and financial results.
Risks Related to Lloyd’s and Other U.K. Regulatory Matters (including effects arising from the exit of the U.K. from the E.U. (“Brexit”)
The regulation of Lloyd’s members and of Lloyd’s by the FCA and PRA and under European Directives and other local laws may result in intervention that could have a significant negative impact on Talbot.
Talbot operates in a regulated jurisdiction. Its underwriting activities are regulated by the FCA and PRA and franchised by Lloyd’s. The FCA and PRA have substantial powers of intervention in relation to the Lloyd’s managing agents that it regulates (such as Talbot Underwriting Ltd.), including the power to remove their authorization to manage Lloyd’s syndicates. In addition, the Lloyd’s Franchise Board is responsible for approving every syndicate’s annual business plan, including the maximum premium volume they may write, and may require changes to any business plan presented to it or additional capital (known as FAL) to be provided to support underwriting. An adverse determination in any of these areas could lead to a change in business strategy which may have an adverse effect on Talbot’s financial condition and results of operations.
Additionally, Lloyd’s worldwide (re)insurance business is subject to local regulation. Changes in such regulation may have an adverse effect on Lloyd’s generally and on Talbot in particular. Brexit may restrict Talbot’s ability to underwrite business in the E.U.
Should Lloyd’s Council decide additional levies are required to support the central fund, this could adversely affect Talbot.
The central fund, which is funded by annual contributions from Lloyd’s members and loans, acts as a policyholders’ protection fund to make payments where any Lloyd’s member has failed to pay, or is unable to pay, valid claims. The Lloyd’s Council may resolve to make payments from the central fund for the advancement and protection of policyholders, which could lead to additional or special contributions being payable by Lloyd’s members, including Talbot. This, in turn, could adversely affect Talbot and the Company.
The failure of Lloyd’s to satisfy the PRA’s annual solvency test could result in limitations on managing agents’ ability, including Talbot’s ability, to underwrite or the commencement of legal proceedings against Lloyd’s.
The PRA requires Lloyd’s to satisfy an annual solvency test. The solvency requirement in essence measures whether Lloyd’s has sufficient assets in the aggregate to meet all outstanding liabilities of its members, both current and in run-off. If Lloyd’s fails to satisfy the test in any year, the PRA may require Lloyd’s to cease trading and/or its members to cease or reduce underwriting. In the event of Lloyd’s failing to meet any solvency requirement, either the Society of Lloyd’s or the PRA may apply to the court for a Lloyd’s Market Reorganization Order (“LMRO”). On the making of an order a “reorganization controller” is appointed, and for its duration, a moratorium is imposed preventing any proceedings or legal process from being commenced or continued against any party that is the subject of such an order, which, if made, would apply to the market as a whole, including members, former members, managing agents, members’ agents, Lloyd’s brokers, approved run-off companies and managing general agents unless individual parties are specifically excluded.
A downgrade in Lloyd’s ratings would have an adverse effect on the Talbot Syndicate’s standing among brokers and customers and cause its premiums and earnings to decrease.
The ability of Lloyd’s syndicates to trade in certain classes of business at current levels is dependent on the maintenance of a satisfactory credit rating issued by a recognized rating agency. The financial security of the Lloyd’s market is regularly assessed by three independent rating agencies, A.M. Best, Standard & Poor’s and Fitch Ratings. Lloyd’s current ratings are: A.M. Best: A, Stable Outlook; Standard & Poor’s: A+, Negative Outlook; Fitch Ratings: AA-, Negative Outlook.
An increase in the charges paid by Talbot to participate in the Lloyd’s market could adversely affect Talbot’s financial and operating results.
Lloyd’s imposes a number of charges on businesses operating in the Lloyd’s market, including, for example, annual subscriptions and central fund contributions for members and policy signing charges. The basis and amounts of charges may be varied by Lloyd’s and could adversely affect Talbot and the Company.

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An increase in the level or type of deposits required by U.S. Situs Trust Deeds to be maintained by Lloyd’s syndicates could result in the Talbot Syndicate being required to make a cash call which could adversely affect Talbot’s financial performance.
The U.S. Situs Trust Deeds require syndicates transacting certain types of business in the United States to maintain minimum deposits as protection for U.S. policyholders. These deposits represent the syndicates’ estimates of unpaid claims liabilities (less premiums receivable) relating to this business, adjusted for provisions for potential bad debt on premiums earned but not received and for any anticipated profit on unearned premiums. No credit is generally allowed for potential reinsurance recoveries. The New York Department of Financial Services and the NAIC currently require funding of 30% of gross liabilities in relation to insurance business classified as “Surplus Lines.” The “Credit for Reinsurance” trust fund is usually required to be funded at 100% of gross liabilities. The funds contained within the deposits are not ordinarily available to meet trading expenses. U.S. regulators may increase the level of funding required or change the requirements as to the nature of funding. Accordingly, in the event of a major claim arising in the United States, for example from a major catastrophe, syndicates participating in such U.S. business may be required to make cash calls on their members to meet claims payments and deposit funding obligations. This could adversely affect Talbot.
Risks Related to Taxation
Our non U.S companies may be subject to U.S. tax.
We intend to operate in such a manner that none of our non-U.S. companies would be unintendedly considered engaged in a U.S. trade or business. No definitive standards, however, are provided by the Internal Revenue Code of 1986, as amended (the “Code”), U.S. Treasury regulations or court decisions regarding activities that constitute the conduct of a U.S. trade or business. Because that determination is essentially factual, there can be no assurance that the Internal Revenue Service (the “IRS”) will not contend that we are engaged in a U.S. trade or business. If we were found to be so engaged, we could be subject to U.S. corporate income and branch profits tax on our earnings that are effectively connected to such U.S. trade or business.
If the group company involved is entitled to the benefits of a U.S. income tax treaty (the “Treaty”), it would not be subject to U.S. income tax on any income protected by the Treaty unless that income is attributable to a permanent establishment in the U.S. The income tax treaty between the U.S. and Bermuda (the “Bermuda Treaty”) clearly applies to premium income, but may be construed as not protecting other income such as investment income. If any of the Company’s Bermuda based subsidiaries were found to be engaged in a trade or business in the U.S. and were entitled to the benefits of the Bermuda Treaty in general, but the Bermuda Treaty was found not to protect investment income, a portion of the relevant subsidiary’s investment income could be subject to U.S. tax.
U.S. persons who hold common shares may be subject to U.S. income taxation at ordinary income rates on our undistributed earnings and profits.
Controlled Foreign Corporation Status: The Company should not be a controlled foreign corporation (“CFC”) because its organizational documents provide that if the common shares owned, directly, indirectly or by attribution, by any person would otherwise represent more than 9.09% of the aggregate voting power of all the Company’s common shares, the voting rights attached to those common shares will be reduced so that such person may not exercise and is not attributed more than 9.09% of the total voting power of the common shares. There can be no assurance, however, that the provisions of the Organizational Documents will operate as intended and that the Company will not be considered a CFC. In addition, under the U.S. Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) CFC status can also be triggered if a United States person owns shares without voting rights. Given the absence of regulations and other detailed guidance relating to the interpretation of the 2017 Tax Act, there can be no assurance that shareholders will not be adversely impacted by the new rules.
If the Company were considered a CFC, any shareholder that is a U.S. person that owns directly, indirectly or by attribution, 10% or more of the voting power of the Company may be subject to current U.S. income taxation at ordinary income tax rates on all or a portion of the Company’s undistributed earnings and profits attributable to the Company’s (re)insurance income, including underwriting and investment income. Any gain realized on sale of common shares by such shareholder may also be taxed as a dividend to the extent of the Company’s earnings and profits attributed to such shares during the period that the shareholder held the shares and while the Company was a CFC (with certain adjustments).
Related Person Insurance Income: If the related person insurance income (“RPII”) of any of the Company’s non-U.S. insurance subsidiaries were to equal or exceed 20% of that subsidiary’s gross insurance income in any taxable year, and U.S. persons were treated as owning 25% or more of the subsidiary’s stock, by vote or value, a U.S. person who directly or indirectly owns any common shares on the last day of such taxable year on which the 25% threshold is met would be required to include in income for U.S. federal income tax purposes that person’s ratable share of that subsidiary’s RPII for the taxable year. The amount to be included in income is determined as if the RPII were distributed proportionately to U.S. shareholders on that date, regardless of whether that income is distributed. The amount of RPII to be included in income is limited by such shareholder’s share of the subsidiary’s current-year earnings and profits, and possibly reduced by the shareholder’s share of prior year deficits in earnings and profits. The amount of RPII earned by a subsidiary will depend on several factors, including the identity of persons directly or indirectly insured or reinsured by that subsidiary. Although we do not believe that the 20% threshold will be met for our non-U.S. insurance subsidiaries, some of

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the factors that might affect that determination in any period may be beyond our control. Consequently, we cannot assure that we will not exceed the RPII threshold in any taxable year.
If a U.S. person disposes of shares in a non-U.S. insurance corporation that had RPII (even if the 20% threshold was not met) and the 25% threshold is met at any time during the five-year period ending on the date of disposition, and the U.S. person owned any shares at such time, any gain from the disposition will generally be treated as a dividend to the extent of the holder’s share of the corporation’s undistributed earnings and profits that were accumulated during the period that the holder owned the shares (possibly whether or not those earnings and profits are attributable to RPII). In addition, the shareholder will be required to comply with specified reporting requirements, regardless of the amount of shares owned. We believe that those rules should not apply to a disposition of common shares because the Company is not itself directly engaged in the insurance business. We cannot assure, however, that the IRS will not successfully assert that those rules apply to a disposition of common shares.
U.S. persons who hold common shares will be subject to adverse tax consequences if the Company is considered a passive foreign investment company for U.S. federal income tax purposes.
If the Company is considered a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes, a U.S. holder who owns common shares will be subject to adverse tax consequences, including a greater tax liability than might otherwise apply and an interest charge on certain taxes that are deferred as a result of the Company’s non-U.S. status. We currently do not expect that the Company will be a PFIC for U.S. federal income tax purposes in the current taxable year or the foreseeable future because, through Validus Reinsurance, Ltd., Talbot 2002 Underwriting Capital Ltd., Validus Reinsurance (Switzerland) Ltd and Talbot Underwriting Ltd., it intends to be predominantly engaged in the active conduct of a global (re)insurance business. We cannot assure you, however, that the Company will not be deemed to be a PFIC by the IRS. No regulations currently exist regarding the application of the PFIC provisions to an insurance company.
Under the 2017 Tax Act, the PFIC rules include an assets to liability test to determine whether the active insurance exemption applies. The test requires the insurance company to have applicable insurance liabilities in excess of 25% of its total assets as reported on the company’s financial statements. Although Validus expects that it will qualify for this exemption, absent regulations and other detailed guidance relating to the interpretation of the 2017 Tax Act, there can be no assurance that the Company will meet the requirements for the active insurance exemption.
The ongoing effects of the 2017 Tax Act and the refinement of provisional estimates could make our results difficult to predict.
Our effective tax rate may fluctuate in the future as a result of the 2017 Tax Act. The 2017 Tax Act introduces significant changes to U.S. income tax law that will have a meaningful impact on our provision for income taxes and requires significant judgments and estimates in the interpretation and calculations. We made reasonable estimates of the effects and recorded provisional amounts in our financial statements for the year ended December 31, 2017. However, we cannot assure that the IRS will apply the new tax law in a way similar to our interpretation.
The 2017 Tax Act introduced sweeping new tax legislation in the U.S., including, but not limited to, reducing the corporate tax rate, altering the net interest deductibility and the Base Erosion Minimum Tax. Subject to any regulations issued by the U.S. Department of the Treasury, the Base Erosion Tax levies a significant tax on cross border payments to related group companies. This tax will subject intragroup quota share reinsurance arrangements to a base erosion tax on gross premiums ceded. Although the Company believes that the financial impact of this new tax will be marginal, absent regulations and other detailed guidance, uncertainty about the final impact remains.
We may become subject to taxes in Bermuda after March 31, 2035, which may have a material adverse effect on our results of operations.
Under current Bermuda law, we are not subject to tax on income or capital gains. We have received from the Minister of Finance under The Exempted Undertaking Tax Protection Act 1966, as amended, an assurance that, in the event that Bermuda enacts legislation imposing tax computed on profits, income, any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance, then the imposition of any such tax shall not be applicable to us or to any of our operations or shares, debentures or other obligations, until March 31, 2035. We could be subject to taxes in Bermuda after that date. This assurance is subject to the provision that it is not to be construed to prevent the application of any tax or duty to such persons as are ordinarily resident in Bermuda or to prevent the application of any tax payable in accordance with the provisions of the Land Tax Act 1967 or otherwise payable in relation to any property leased to us. The Company’s Bermuda-domiciled subsidiaries each pay annual Bermuda government fees and each Bermuda subsidiary licensed insurer and reinsurer pays an annual insurance license fee. In addition, all entities employing individuals in Bermuda are required to pay a payroll tax and there are other sundry taxes payable, directly or indirectly, to the Bermuda government.

35

The impact of Bermuda’s letter of commitment to the Organization for Economic Cooperation and Development (“OECD”) to eliminate harmful tax practices is uncertain and could adversely affect our tax status in Bermuda.
The OECD has published reports and launched a global initiative among member and non-member countries on measures to limit harmful tax competition. These measures are largely directed at counteracting the effects of tax havens and preferential tax regimes in countries around the world. Bermuda was not listed in the most recent report as an uncooperative tax haven jurisdiction because it had previously committed to eliminate harmful tax practices, to embrace international tax standards for transparency, to exchange information and to eliminate an environment that attracts business with no substantial domestic activity. We are not able to predict what changes will arise from the commitment or whether such changes will subject us to additional taxes.
Our non-U.K. companies may be subject to U.K. tax.
We intend to operate in such a manner that none of our non-U.K. companies would be resident in the U.K. for tax purposes. A company incorporated outside the U.K. will be deemed resident if its business is centrally managed and controlled from the U.K. The concept of central management and control is not defined in statute but derives from case law and the determination of residence is subjective, therefore Her Majesty’s Revenue and Customs (“HMRC”) might contend successfully that one or more of our companies are resident in the U.K.
Furthermore, we intend to operate in such a manner that none of our non-U.K. companies carry on a trade wholly or partly in the U.K. Case law has held that whether or not a trade is being carried on is a matter of fact and emphasis is placed on where operations take place from which the profits in substance arise. This judgment is subjective. The HRMC might contend successfully that one or more of our non-U.K. companies, is conducting business in the U.K. For tax purposes, a non-U.K. tax resident company will only be subject to corporation tax if it carries on a trade in the U.K. through a permanent establishment. However, that company will still have an income tax liability if it carries on a trade in the U.K., even absent a permanent establishment, unless that company is treaty-protected.
We may become subject to taxation on profits generated in Bermuda as a result of the OECD’s final recommendations on Base erosion and profit shifting (“BEPS”)
In 2015, the OECD published final recommendations on BEPS. These recommendations propose the development of rules to prevent base erosion and profit shifting which may drive fundamental changes in the perception of tax structuring and transfer pricing by tax authorities. The recommendations include adopting transfer pricing rules or special measures to ensure that returns will not accrue to an entity solely because it has contractually assumed risks or has provided capital. BEPS will likely put a much greater emphasis on the location of individuals and their contributions towards profit generation. This would notably result in a significant change to the existing transfer pricing rules and could potentially have a significant impact on the allocation of taxable profits throughout the Company. Furthermore, these developments might also result in significant changes to the rules that govern the creation of a taxable presence in a foreign country. As a consequence, profits currently generated in Bermuda may become subject to taxation outside Bermuda.
Our non-Swiss companies may be subject to taxation in Switzerland.
We intend to operate in such a manner that none of our non-Swiss companies would be resident in Switzerland for tax purposes. A company incorporated outside Switzerland will be deemed resident if its business is centrally managed and controlled from Switzerland. However, the analysis is factual and the Swiss tax authorities might contend successfully that one or more of our non-Swiss group companies are resident in Switzerland.
Furthermore, a group company incorporated and managed outside of Switzerland should not be liable for Swiss corporation taxation unless it carries on business through a permanent establishment in Switzerland. From a Swiss tax perspective, a permanent establishment is a fixed place of business through which a company performs business activities that are considered as being quantitatively and qualitatively significant by the tax authorities, and may include a branch, office, agency or place of management. As of the date of this Annual Report, the Validus group intends to operate in such a manner so that none of our non-Swiss companies will carry on business through a permanent establishment in Switzerland. If any of our companies were to be treated as carrying on business in Switzerland through a branch or agency or of having a permanent establishment in Switzerland, our results of operations could be adversely affected.
Diverted Profit Tax in the U.K.
The U.K. Authorities enacted a new Diverted Profits Tax as of April 1, 2015 on profits of multinationals artificially diverted from the U.K. The tax rate will be 25%. Diverted Profits Tax will apply in two situations; (a) where a foreign company has artificially avoided having a taxable presence in the U.K, or (b) where a group has entered into a tax advantageous structure or transaction that lacks economic substance.
Although the legislation intends to address aggressive tax planning which is artificial or lacks economic substance, the legislation has a wider reach. The Validus group has significant U.K. operations and several intragroup reinsurance agreements. We believe that

36

these transactions have economic substance and should fall outside the intended reach of the Diverted Profit Tax. However, we are not able to predict the financial impact of the new Diverted Profits Tax and such impact may be adverse.
Risks Related to Laws and Regulations Applicable to Us
If we become subject to insurance statutes and regulations in addition to the statutes and regulations that currently apply to us, there could be a significant and negative impact on our business.
We currently conduct our business in a manner such that we expect the Company will not be subject to insurance and/or reinsurance licensing requirements or regulations in any jurisdiction other than Bermuda, Switzerland, the United States, and, with respect to Talbot, the U.K. and jurisdictions to which Lloyd’s is subject. Refer to Part I, Item 1 “Business — Regulation.” Although we do not currently intend to engage in activities which would require us to comply with (re)insurance licensing requirements of other jurisdictions, should we choose to engage in activities that would require us to become licensed in such jurisdictions, we cannot assure you that we will be able to do so or that we will be able to do so in a timely manner.
The (re)insurance regulatory framework has recently become subject to increased scrutiny in many jurisdictions. Governmental authorities in both the U.S. and worldwide have become increasingly interested in the potential risks posed by the insurance industry as a whole, and to commercial and financial systems in general. For example, the U.S. Congress and the current administration have made, or called for consideration of, several additional proposals relating to a variety of issues with respect to financial regulation reform, including the Dodd-Frank Act that was signed into law by President Obama on July 21, 2010. The Dodd-Frank Act represented a comprehensive overhaul of the regulation of the financial services industry within the United States and established a Federal Insurance Office under the U.S. Treasury Department to monitor all aspects of the insurance industry and of lines of business other than certain health insurance, certain long-term care insurance and crop insurance. The director of the Federal Insurance Office has the ability to recommend that an insurance company or an insurance holding company be subject to heightened prudential standards under the supervision of the Federal Reserve. In addition, some state legislators have considered or enacted laws that will alter and likely increase state regulation of (re)insurance companies and holding companies. Furthermore, the NAIC, which is an association of the insurance commissioners of all 50 states and the District of Columbia, regularly reexamines existing laws and regulations.
Government regulators are generally concerned with the protection of policyholders rather than other constituencies, such as our shareholders. We are not able to predict the exact nature, timing or scope of changes in laws and regulations to which we are or may become subject; however, compliance with such laws and regulations may result in additional costs which may adversely impact our results of operations.
Our international business is subject to applicable laws and regulations relating to sanctions and foreign corrupt practices, the violation of which could adversely affect our operations.
We must comply with all applicable economic sanctions and anti-bribery laws and regulations of the United States and other foreign jurisdictions where we operate, including the United Kingdom and the European Community. United States laws and regulations applicable to us include the economic trade sanctions laws and regulations administered by the United States Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) as well as certain laws administered by the United States Department of State. In addition, we are subject to the Foreign Corrupt Practices Act (“FCPA”) and other anti-bribery laws such as the Bermuda Bribery Act 2016 and the UK Bribery Act that generally bar corrupt payments or unreasonable gifts to foreign governments or officials. Although we have policies and controls in place that are designed to ensure compliance with these laws and regulations, it is possible that an employee or intermediary could fail to comply with applicable laws and regulations. In such event, we could be exposed to civil penalties, criminal penalties and other sanctions, including fines or other punitive actions. In addition, such violations could damage our business and/or our reputation. Such criminal or civil sanctions, penalties, other sanctions, and damage to our business and/or reputation could have a material adverse effect on our financial condition and results of operations.
Risks Related to Ownership of Our Common Shares
Because Validus Holdings, Ltd. is a holding company and substantially all of our operations are conducted by our main operating subsidiaries our ability to meet any ongoing cash requirements and to pay dividends will depend on our ability to obtain cash dividends or other cash payments or obtain loans from these subsidiaries.
We conduct substantially all of our operations through subsidiaries. Our ability to meet our ongoing cash requirements, including any debt service payments or other expenses, and pay dividends on our common shares in the future, will depend on our ability to obtain cash dividends or other cash payments or obtain loans from these subsidiaries and as a result will depend on the financial condition of these subsidiaries. The inability of these subsidiaries to pay dividends in an amount sufficient to enable us to meet our cash requirements could have a material adverse effect on us and the value of our common shares. Each of these subsidiaries is a separate and distinct legal entity that has no obligation to pay any dividends or to lend or advance us funds and may be restricted from doing so by contract, including other financing arrangements, charter provisions or applicable legal and regulatory requirements or rating agency constraints. The payment of dividends by these subsidiaries to us is limited under Bermuda, U.K. and U.S. laws and regulations. The Insurance Act provides that our Bermuda Class 3B and 4 insurance subsidiaries may not declare or pay in any

37

financial year dividends of more than 25% of their total statutory capital and surplus (as shown on their statutory balance sheets in relation to the previous financial year) unless they file an affidavit with the BMA at least seven days prior to the payment signed by at least two directors and such subsidiary’s principal representative, stating that in their opinion such subsidiaries will continue to satisfy the required margins following declaration of those dividends, though there is no additional requirement for BMA approval. In addition, before reducing its total statutory capital by 15% or more (as set out in its previous years’ statutory financial statements) each of our Class 3A and Class 4 insurance subsidiaries must make application to the BMA for permission to do so, such application to consist of an affidavit signed by at least two directors and such subsidiary’s principal representative stating that in their opinion the proposed reduction in capital will not cause such subsidiaries to fail to meet its relevant margins, and such other information as the BMA may require. Each of our Class 3 insurance subsidiaries must make application to the BMA before reducing its total statutory capital by 15% or more and should provide such information as the BMA may require. As at December 31, 2017, the Bermuda regulated subsidiaries have the ability to distribute up to $1.5 billion of unrestricted net assets as dividend payments or return of capital to Validus Holdings, Ltd. without prior regulatory approval.
Lloyd’s requires the Company to hold cash and investments in trust for the benefit of policyholders either as trust funds or as Funds at Lloyd’s (“FAL”). Talbot may not distribute funds from the Talbot Syndicate into its corporate member’s trust accounts unless, firstly, they are represented by audited profits and, secondly, the Talbot Syndicate has adequate future cash flow to service its policyholders. Talbot’s corporate member may not distribute funds to Talbot’s unregulated bank or investment accounts unless they are represented by a surplus of cash and investments over the FAL requirement. Additionally, U.K. company law prohibits Talbot’s corporate name from declaring a dividend to the Company unless it has profits available for distribution. The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses. While the U.K. insurance regulatory laws do not impose statutory restrictions on a corporate name’s ability to declare a dividend, the FCA and PRA rules require maintenance of each insurance company’s solvency margin within its jurisdiction.
Western World’s operating subsidiaries are domiciled in the state of New Hampshire. New Hampshire insurance laws limit the amount of dividends Western World may pay to the Company in any 12 month period without prior approval of the New Hampshire State Insurance Department. These limitations are based on the lesser of: a maximum of 10% of prior year end statutory surplus as determined under statutory accounting practices or the net income, not including realized capital gains, for the 12-month period ending December 31, next preceding, but shall not include pro rata distributions of any class of the insurer’s own securities. In determining whether a dividend or distribution is extraordinary, an insurer may carry forward net income from the previous two calendar years that has not already been paid out as dividends. This carry-forward shall be computed by taking the net income from the second and third preceding calendar years, not including realized capital gains, less dividends paid in the second and immediate preceding calendar years. As at December 31, 2017, the maximum dividend that may be paid to the Company by Western World without obtaining prior approval was $nil.
The timing and amount of any cash dividends on our common shares are at the discretion of our Board of Directors and will depend upon our results of operations and cash flows, our financial position and capital requirements, general business conditions, legal, tax, regulatory, rating agency and contractual constraints or restrictions and any other factors that our Board of Directors deems relevant. In addition, the indentures governing our Junior Subordinated Deferrable Debentures would restrict us from declaring or paying dividends on our common shares if we are downgraded by A.M. Best to a financial strength rating of “B” (Fair) or below or if A.M. Best withdraws its financial strength rating on any of our material insurance subsidiaries.
Future sales of our common shares and grants of restricted shares may affect the market price of our common shares and the future exercise of options may result in immediate and substantial dilution of the common shares.
As of December 31, 2017 (but without giving effect to unvested restricted shares), we had 79,319,550 common shares outstanding. Approximately 1,937,502 of these outstanding shares were subject to the volume limitations and other conditions of Rule 144 under the Securities Act of 1933, as amended, which we refer to as the “Securities Act.” In addition, we have filed one or more registration statements on Form S-8 under the Securities Act to register common shares issued or reserved for issuance under our Amended and Restated 2005 Long Term Incentive Plan (the “Plan”). The number of common shares that have been reserved for issuance under the Plan is equal to 2,753,292 of which 702,305 shares remain available as of December 31, 2017. We cannot predict what effect, if any, future sales of our common shares, or the availability of common shares for future sale, will have on the market price of our common shares. Sales of substantial amounts of our common shares in the public market, or the perception that sales of this type could occur, could depress the market price of our common shares and may make it more difficult for our shareholders to sell their common shares at a time and price that they deem appropriate.
Our Bye-laws authorize our Board of Directors to issue one or more series of common shares and preferred shares without shareholder approval. Specifically, we have an authorized share capital of 571,428,571 shares ($0.175 par value per share), which can consist of common shares and/or preference shares, as determined by our Board of Directors. The Board of Directors has the right to issue the remaining shares without obtaining any approval from our shareholders and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences and the number of shares constituting any series or designation of such series. Any issuance of our preferred stock could adversely affect

38

the voting power of the holders of our common shares and could have the effect of delaying, deferring, or preventing the payment of any dividends (including any liquidating dividends) and any change in control of us. If a significant number of either common or preferred shares are issued, it may cause the market price of our common shares to decline.
Our classified board structure may prevent a change in our control.
Our Board of Directors is divided into three classes of directors. Each year one class of directors is elected by the shareholders for a three year term. The staggered terms of our directors may reduce the possibility of a tender offer or an attempt at a change in control, even though a tender offer or change in control might be in the best interest of our shareholders.
There are provisions in our Bye-laws that reduce the voting rights of voting common shares that are held by a person or group to the extent that such person or group holds more than 9.09% of the aggregate voting power of all common shares entitled to vote on a matter.
In general, and except as provided below, shareholders have one vote for each common share held by them and are entitled to vote at all meetings of shareholders. However, if, and for so long as, the common shares of a shareholder, including any votes conferred by “controlled shares” (as defined below), would otherwise represent more than 9.09% of the aggregate voting power of all common shares entitled to vote on a matter, including an election of directors, the votes conferred by such shares will be reduced by whatever amount is necessary such that, after giving effect to any such reduction (and any other reductions in voting power required by our Bye-laws), the votes conferred by such shares represent 9.09% of the aggregate voting power of all common shares entitled to vote on such matter. “Controlled shares” include, among other things, all shares that a person is deemed to own directly, indirectly or constructively (within the meaning of Section 958 of the Code, or Section 13(d) (3) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)). At December 31, 2017, there were 81,399,947 common shares, of which 7,399,255 common shares would confer votes that represent 9.09% of the aggregate voting power of all common shares entitled to vote generally at an election of directors. An investor who does not hold, and is not deemed under the provisions of our Bye-laws to own, any of our common shares may therefore purchase up to such amount without being subject to voting cutback provisions in our Bye-laws.
In addition, we have the authority under our Bye-laws to request information from any shareholder for the purpose of determining ownership of controlled shares by such shareholder.
There are regulatory limitations on the ownership and transfer of our common shares which could result in the delay or denial of any transfers shareholders might seek to make.
The BMA must approve all issuances and transfers of securities of a Bermuda exempt company except where a general permission applies under the Exchange Control Act 1972 and related regulations. We have received permission from the BMA to issue our common shares and securities, and for the free transferability of our common shares and securities, as long as the common shares are listed on the New York Stock Exchange or other appointed exchange, to and among persons who are residents and non-residents of Bermuda for exchange control purposes. Any other transfers remain subject to approval by the BMA and such approval may be denied or delayed. Additionally issuances and transfers of voting or controlling shares of Bermuda registered insurance subsidiaries requires application to, or notification to, the BMA Insurance Division (depending on the circumstances) pursuant to the Insurance Act.
A shareholder of our Company may have greater difficulties in protecting its interests than as a shareholder of a U.S. corporation.
The Companies Act 1981 (the “Companies Act”), which applies to us, differs in material respects from laws generally applicable to U.S. corporations and their shareholders. Taken together with the provisions of our Bye-laws, some of these differences may result in a shareholder having greater difficulties in protecting its interests as a shareholder of our company than it would have as a shareholder of a U.S. corporation. This affects, among other things, the circumstances under which transactions involving an interested director are voidable, whether an interested director can be held accountable for any benefit realized in a transaction with our Company, what approvals are required for business combinations by our Company with a large shareholder or a wholly–owned subsidiary, what rights a shareholder may have as a shareholder to enforce specified provisions of the Companies Act or our Bye-laws, and the circumstances under which we may indemnify our directors and officers.
We are a Bermuda company and it may be difficult for our shareholders to enforce judgments against us or against our directors and executive officers.
We were incorporated under the laws of Bermuda and our business is based in Bermuda. In addition, certain of our directors and officers reside outside the United States, and a portion of our assets and the assets of such persons may be located in jurisdictions outside the United States. As such, it may be difficult or impossible to effect service of process within the United States upon us or those persons, or to recover against us or them on judgments of U.S. courts, including judgments predicated upon the civil liability provisions of the U.S. federal securities laws. Further, no claim may be brought in Bermuda against us or our directors and officers in the first instance for violation of U.S. federal securities laws because these laws have no extraterritorial application under Bermuda law and do not have force of law in Bermuda; however, a Bermuda court may impose civil liability, including the possibility of monetary damages, on us or our directors and officers if the facts alleged in a complaint constitute or give rise to a cause of action

39

under Bermuda law. Currently, of our executive officers, Kean Driscoll, Jeffrey Sangster, Robert Kuzloski, Michael Moore, Patrick Boisvert and Lixin Zeng reside in Bermuda, Edward Noonan and Andrew Kudera maintain residences in both Bermuda and the United States, Peter Bilsby resides in the United Kingdom and the remainder reside in the United States. Of our directors, Edward Noonan maintains residences in both Bermuda and the United States, Jean-Marie Nessi resides in France, Michael Carpenter resides in the United Kingdom and the remainder reside in the United States.
We have been advised by Bermuda counsel that there is doubt as to whether the courts of Bermuda would enforce judgments of U.S. courts obtained in actions against us or our directors and officers, predicated upon the civil liability provisions of the U.S. federal securities laws, or original actions brought in Bermuda against us or such persons predicated solely upon U.S. federal securities laws. Further, we have been advised by Bermuda counsel that there is no treaty in effect between the United States and Bermuda providing for the enforcement of judgments of U.S. courts in civil and commercial matters, and there are grounds upon which Bermuda courts may decline to enforce the judgments of U.S. courts. Some remedies available under the laws of U.S. jurisdictions, including some remedies available under the U.S. federal securities laws, may not be allowed in Bermuda courts as contrary to public policy in Bermuda. Because judgments of U.S. courts are not automatically enforceable in Bermuda, it may be difficult for our shareholders to recover against us based upon such judgments.
Item 1B.    Unresolved Staff Comments
None.
Item 2.    Properties
The Company and its subsidiaries occupy office space in Australia, Bermuda, Canada, Chile, Singapore, Switzerland, United Arab Emirates, United Kingdom and the United States. We renew and enter into leases in the ordinary course of business as required. We believe our current facilities and the leaseholds with respect thereto are sufficient for us to conduct our operations. The main operating locations of the Company and its primary leaseholders are as follows:
Legal entity
 
Location
 
Expiration date
Validus Holdings, Ltd.
 
Pembroke, Bermuda
 
December 31, 2021
Validus Research Inc. 
 
Waterloo, Canada
 
March 31, 2020
Validus Specialty, Inc.
 
New York, New York, USA
 
June 30, 2032
Talbot Holdings Ltd. and Talbot Underwriting Services Ltd. 
 
London, England
 
June 22, 2024
Validus Reinsurance (Switzerland) Ltd
 
Zurich, Switzerland
 
January 31, 2019
Western World Insurance Group, Inc.
 
Parsippany, New Jersey, USA
 
March 31, 2030
Item 3.    Legal Proceedings
During the normal course of business, the Company and its subsidiaries are subject to litigation and arbitration. Legal proceedings such as claims litigation are common in the (re)insurance industry in general. The Company and its subsidiaries may be subject to lawsuits and regulatory actions in the normal course of business that do not arise from or directly relate to claims on reinsurance treaties or contracts or insurance policies.
Litigation typically can include, but is not limited to, allegations of underwriting errors or misconduct, employment claims, regulatory activity, shareholder disputes or disputes arising from business ventures. These events are difficult, if not impossible, to predict with certainty. It is Company policy to dispute all allegations against the Company and/or its subsidiaries that management believes are without merit.
As at December 31, 2017, the Company was not a party to, or involved in any litigation or arbitration that it believes could have a material adverse effect on the financial condition, results of operations or liquidity of the Company.
Item 4.    Mine Safety Disclosure
Not applicable.

40

PART II
All amounts presented in this part are in U.S. dollars except as otherwise noted.
Item 5.    Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
The Company’s common shares are listed on the New York Stock Exchange (“NYSE”) under the symbol “VR.” On February 27, 2018, the last reported sale price for the Company’s common shares was $67.35 per share.
The following tables set forth the high and low sales prices per share, as reported on the NYSE Composite Tape, of the Company’s common shares per fiscal quarter for the two most recent fiscal years.
 
 
2017
 
2016
Period
 
High
 
Low
 
High
 
Low
1st Quarter
 
$
58.76

 
$
54.66

 
$
47.58

 
$
41.73

2nd Quarter
 
$
57.40

 
$
51.21

 
$
48.77

 
$
44.23

3rd Quarter
 
$
54.44

 
$
41.15

 
$
51.43

 
$
47.14

4th Quarter
 
$
53.30

 
$
45.72

 
$
56.41

 
$
48.77

On December 31, 2017, there were 37 holders of record of the Company’s common shares. This figure does not represent the actual number of beneficial owners of our common shares because such shares are frequently held in “street name” by securities dealers and others for the benefit of individual owners.
Performance Graph
The following graph compares the cumulative total shareholder return on the Company’s common shares, including reinvestment of dividends on our common shares, as compared to the cumulative total return of the S&P 500 Composite Stock Price Index (“S&P 500”) and the cumulative total return of an index of the Company’s peer group for the five year period commencing December 31, 2012 and ending December 31, 2017, assuming $100 was invested on December 31, 2012.
The Company’s peer group index is comprised of the following companies: Alleghany Corporation, Arch Capital Group, Limited, Argo Group International Holdings, Ltd., Aspen Insurance Holdings Limited, AXIS Capital Holdings Limited, Everest Re Group Ltd., RenaissanceRe Holdings Ltd. and XL Group Ltd.
snlperformance2017.jpg

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Dividend Policy
We are a holding company and have no direct operations. Our ability to pay dividends depends, in part, on the ability of our principal operating subsidiaries to pay dividends to us. As a holding company, Validus Holdings, Ltd.'s principal source of income is dividends or other sources of permitted payments from its subsidiaries. These funds provide the cash flow required for dividend payments to the Company's shareholders. As at December 31, 2017, our Bermuda regulated subsidiaries have the ability to distribute up to $1.5 billion of unrestricted net assets as dividend payments or return of capital to Validus Holdings, Ltd. without prior regulatory approval. For addition information refer to Part 1, Item 1, “Business—Regulation,” Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Sources of Liquidity,” and Note 26 to the Consolidated Financial Statements, “Statutory and regulatory requirements,” in Part II, Item 8.
For the years ended December 31, 2017 and 2016, the Company declared and paid quarterly dividends of $0.38 and $0.35 per common share, respectively.
During the year ended December 31, 2017, the Company declared and paid quarterly cash dividends on its outstanding Series A Preferred Shares of $0.3671875 per depositary share. These dividends were paid on March 15, 2017, June 15, 2017, September 15, 2017 and December 15, 2017 to shareholders of record on March 1, 2017, June 1, 2017, September 1, 2017 and December 1, 2017, respectively.
During the year ended December 31, 2017, the Company declared and paid cash dividends on its outstanding Series B Preferred Shares of $0.3423611 and $0.3625000 per depositary share on September 15, 2017 and December 15, 2017, respectively. These dividends were paid to shareholders of record on September 1, 2017 and December 1, 2017, respectively.
Issuer Repurchases of Equity Securities
On February 3, 2015, the Board of Directors of the Company approved an increase to the Company’s common share repurchase authorization to $750.0 million. This amount is in addition to the $2.3 billion of common shares repurchased by the Company through February 3, 2015 under its previously authorized share repurchase programs. The common share repurchase program (the “Program”) may be modified, extended or terminated by the Board of Directors at any time. Unless terminated earlier by resolution of the Board of Directors of the Company, the Program will expire when the Company has repurchased the full value of the common shares authorized.
Share repurchases include repurchases by the Company from time to time of shares from employees in order to facilitate the payment of withholding taxes on restricted shares which have vested. The Company repurchases these shares at their fair market value, as determined by reference to the closing price of our common shares on the day the restricted shares vested.
The table below details the following repurchases that were made under the Program through to February 27, 2018:
 
 
Total shares repurchased under publicly announced repurchase program
(Dollars in thousands, except share and per share amounts)
 
Total number of shares repurchased
 
Aggregate Purchase
Price (a)
 
Average Price per Share (a)
 
Approximate dollar value of shares that may yet be purchased under the Program
Cumulative inception-to-date to December 31, 2016
 
80,508,849

 
$
2,704,406

 
$
33.59

 
$
319,995

 
 
 
 
 
 
 
 
 
Cumulative for the nine months ended September 30, 2017
 
351,812

 
18,343

 
$
52.14

 
$
301,652

 
 
 
 
 
 
 
 
 
October 1 - 31, 2017
 
—

 
—

 
$
—

 
$
301,652

November 1 - 30, 2017
 
—

 
—

 
$
—

 
$
301,652

December 1 - 31, 2017
 
175,308

 
8,226

 
$
46.92

 
$
293,426

Cumulative for the three months ended December 31, 2017
 
175,308

 
8,226

 
$
46.92

 
 
Cumulative for the year ended December 31, 2017
 
527,120

 
26,569

 
$
50.40

 
 
Cumulative inception-to-date to December 31, 2017
 
81,035,969

 
$
2,730,975

 
$
33.70

 
$
293,426

 
 
 
 
 
 
 
 
 
Repurchases made subsequent to year-end:
 
 
 
 
 
 
 
 
January 1 - 31, 2018
 
—

 
$
—

 
$
—

 
$
293,426

February 1 - 27, 2018
 
—

 
$
—

 
$
—

 
$
293,426

(a)
Share transactions are on a trade date basis through February 27, 2018 and are inclusive of commissions. Average share price is rounded to two decimal places.

42

Item 6.    Selected Financial Data
The following tables set forth our selected historical consolidated financial information for the last five years ended December 31. The Company was formed on October 19, 2005 and completed the acquisitions of Talbot, IPC, Flagstone, Western World and CRS on July 2, 2007, September 4, 2009, November 30, 2012, October 2, 2014 and May 1, 2017, respectively. Western World is included in the Company’s consolidated results from the October 2, 2014 date of acquisition. CRS is included in the Company’s consolidated results from the May 1, 2017 date of acquisition.
 
 
Years Ended December 31,
(Dollars in thousands)
 
2017
 
2016
 
2015
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
2,950,938

 
$
2,648,705

 
$
2,557,506

 
$
2,358,865

 
$
2,388,446

Reinsurance premiums ceded
 
(469,633
)
 
(289,705
)
 
(328,681
)
 
(313,208
)
 
(375,800
)
Net premiums written
 
2,481,305

 
2,359,000

 
2,228,825

 
2,045,657

 
2,012,646

Change in unearned premiums
 
99,783

 
(109,835
)
 
18,064

 
(52,602
)
 
86,149

Net premiums earned
 
2,581,088

 
2,249,165

 
2,246,889

 
1,993,055

 
2,098,795

Net investment income
 
177,873

 
150,385

 
127,824

 
100,086

 
96,089

Net realized gains (losses) on investments
 
7,623

 
15,757

 
2,298

 
14,917

 
(764
)
Change in net unrealized gains (losses) on investments
 
3,215

 
16,871

 
(32,395
)
 
(2,842
)
 
(52,419
)
Income (loss) from investment affiliate
 
22,010

 
(2,083
)
 
4,281

 
8,411

 
4,790

Other insurance related income and other income (loss)
 
13,179

 
2,195

 
5,111

 
1,229

 
(6,607
)
Foreign exchange (losses) gains
 
(7,447
)
 
10,864

 
(8,731
)
 
(12,181
)
 
3,949

Total revenues
 
2,797,541

 
2,443,154

 
2,345,277

 
2,102,675

 
2,143,833

Expenses
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
2,300,178

 
1,065,097

 
977,833

 
765,015

 
776,796

Policy acquisition costs
 
471,553

 
449,482

 
410,058

 
339,467

 
360,403

General and administrative expenses
 
352,137

 
336,294

 
363,709

 
329,362

 
316,008

Share compensation expenses
 
40,111

 
42,907

 
38,341

 
33,073

 
27,630

Finance expenses
 
58,546

 
58,520

 
74,742

 
68,324

 
68,007

Transaction expenses (a)
 
4,427

 
—

 
—

 
8,096

 
—

Total expenses
 
3,226,952

 
1,952,300

 
1,864,683

 
1,543,337

 
1,548,844

(Loss) income before taxes, (loss) income from operating affiliate and loss (income) attributable to AlphaCat investors
 
(429,411
)
 
490,854

 
480,594

 
559,338

 
594,989

Tax benefit (expense)
 
7,580

 
19,729

 
(6,376
)
 
(155
)
 
(383
)
(Loss) income from operating affiliate
 
—

 
(23
)
 
(3,949
)
 
(4,340
)
 
542

Loss (income) attributable to AlphaCat investors
 
16,929

 
(23,358
)
 
(2,412
)
 
—

 
—

Net (loss) income
 
(404,902
)
 
487,202

 
467,857

 
554,843

 
595,148

Net loss (income) attributable to noncontrolling interests
 
357,280

 
(123,363
)
 
(92,964
)
 
(74,880
)
 
(62,482
)
Net (loss) income (attributable) available to Validus
 
(47,622
)
 
363,839

 
374,893

 
479,963

 
532,666

Dividends on preferred shares
 
(15,861
)
 
(4,455
)
 
—

 
—

 
—

Net (loss) income (attributable) available to Validus common shareholders
 
$
(63,483
)
 
$
359,384

 
$
374,893

 
$
479,963

 
$
532,666

(a)
Transaction expenses incurred during 2014 and 2017 relate to the acquisitions of Western World and CRS, respectively. Transaction expenses are primarily comprised of legal, financial advisory and audit related services.

43

 
Years Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
Earnings per share
 
 
 
 
 
 
 
 
 
Weighted average number of common shares and common share equivalents outstanding
 
 
 
 
 
 
 
 
 
Basic
79,091,376

 
81,041,974

 
83,107,236

 
90,354,745

 
102,202,274

Diluted
79,091,376

 
82,359,460

 
86,426,760

 
94,690,271

 
103,970,289

 
 
 
 
 
 
 
 
 
 
Basic (loss) earnings per share (attributable) available to Validus common shareholders
$
(0.80
)
 
$
4.43

 
$
4.47

 
$
5.24

 
$
5.02

(Loss) earnings per diluted share (attributable) available to Validus common shareholders
$
(0.80
)
 
$
4.36

 
$
4.34

 
$
5.07

 
$
4.94

 
 
 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
1.52

 
$
1.40

 
$
1.28

 
$
1.20

 
$
3.20

 
 
 
 
 
 
 
 
 
 
Selected financial ratios:
 
 
 
 
 
 
 
 
 
Losses and loss expense ratio (a)
89.1
 %
 
47.4
%
 
43.5
%
 
38.4
%
 
37.0
%
 
 
 
 
 
 
 
 
 
 
Policy acquisition cost ratio (b)
18.3
 %
 
20.0
%
 
18.3
%
 
17.0
%
 
17.1
%
General and administrative expense ratio (c)
15.2
 %
 
16.8
%
 
17.9
%
 
18.2
%
 
16.4
%
Expense ratio (d)
33.5
 %
 
36.8
%
 
36.2
%
 
35.2
%
 
33.5
%
Combined ratio (e)
122.6
 %
 
84.2
%
 
79.7
%
 
73.6
%
 
70.5
%
 
 
 
 
 
 
 
 
 
 
Return on average equity (f)
(1.7
)%
 
9.7
%
 
10.3
%
 
13.0
%
 
14.0
%
(a)
The losses and loss expense ratio is calculated by dividing losses and loss expenses by net premiums earned.
(b)
The policy acquisition cost ratio is calculated by dividing policy acquisition costs by net premiums earned.
(c)
The general and administrative expense ratio is calculated by dividing the sum of general and administrative expenses and share compensation expenses by net premiums earned.
(d)
The expense ratio is calculated by combining the policy acquisition cost ratio and the general and administrative expense ratio.
(e)
The combined ratio is calculated by combining the losses and loss expense ratio, the policy acquisition cost ratio and the general and administrative expense ratio.
(f)
Return on average equity is calculated by dividing the net (loss) income (attributable) available to Validus common shareholders for the period by the average of the beginning, ending and intervening quarter end shareholders’ equity available to Validus common shareholders balances.

44

The following table sets forth summarized balance sheet data as at December 31st for the last five years:
 
 
December 31,
(Dollars in thousands, except share and per share amounts)
 
2017
 
2016
 
2015
 
2014
 
2013
Investments at fair value
 
$
9,695,460

 
$
8,845,343

 
$
7,876,495

 
$
7,444,634

 
$
6,739,461

Cash and cash equivalents and restricted cash
 
1,149,653

 
490,932

 
796,379

 
723,404

 
929,825

Loss reserves recoverable
 
1,233,997

 
430,421

 
350,586

 
377,466

 
370,154

Total assets
 
14,426,879

 
11,349,755

 
10,515,812

 
10,112,564

 
9,457,046

 
 
 
 
 
 
 
 
 
 
 
Reserve for losses and loss expenses
 
4,831,390

 
2,995,195

 
2,996,567

 
3,243,147

 
3,047,933

Unearned premiums
 
1,147,186

 
1,076,049

 
966,210

 
989,229

 
822,280

Senior notes payable
 
245,564

 
245,362

 
245,161

 
244,960

 
244,758

Debentures payable
 
539,158

 
537,226

 
537,668

 
539,277

 
541,416

Total shareholders’ equity available to Validus
 
3,895,072

 
3,838,291

 
3,638,975

 
3,586,586

 
3,704,094

 
 
 
 
 
 
 
 
 
 
 
Book value per common share (a)
 
$
44.06

 
$
46.61

 
$
43.90

 
$
42.76

 
$
38.57

Book value per diluted common share (b)
 
$
42.71

 
$
44.97

 
$
42.33

 
$
39.65

 
$
36.23

Tangible book value per diluted common share (c)
 
$
37.81

 
$
41.16

 
$
38.63

 
$
36.19

 
$
35.03

(a)
Book value per common share is defined as total shareholders’ equity available to Validus common shareholders divided by the number of common shares outstanding as at the end of the period, giving no effect to dilutive securities.
(b)
Book value per diluted common share is calculated based on total shareholders’ equity available to Validus common shareholders plus the assumed proceeds from the exercise of outstanding options and warrants, divided by the sum of common shares, unvested restricted shares and options and warrants outstanding (assuming their exercise). Book value per diluted common share is a non-GAAP financial measure, which are described in the section entitled “Non-GAAP Financial Measures.”
(c)
Tangible book value per diluted common share is calculated based on total shareholders’ equity available to Validus common shareholders, less goodwill and other intangible assets, plus the assumed proceeds from the exercise of outstanding options and warrants, divided by the sum of common shares, unvested restricted shares and options outstanding and warrants (assuming their exercise). Tangible book value per diluted common share is a non-GAAP financial measure, which are described in the section entitled “Non-GAAP Financial Measures.”
The above summary consolidated financial information should be read together with the other information contained in this Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related notes included elsewhere herein.

45

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion and analysis of the Company’s consolidated results of operations for the years ended December 31, 2017, 2016 and 2015 and the Company’s consolidated financial condition, liquidity and capital resources as at December 31, 2017 and 2016. This discussion and analysis should be read in conjunction with the Company’s audited Consolidated Financial Statements and related notes thereto included elsewhere within this filing.
For a variety of reasons, the Company’s historical financial results may not accurately indicate future performance. See “Cautionary Note Regarding Forward-Looking Statements.” The Risk Factors set forth in Item 1A above present a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.

46

Executive Overview
The Company conducts its operations worldwide through three reportable segments which have been determined under U.S. GAAP segment reporting to be Reinsurance, Insurance, and Asset Management.
In addition, the Company has a corporate and investment function (“Corporate and Investments”), which includes the activities of the parent company, and which carries out certain functions for the group, including investment management. Corporate and Investments includes investment income on a managed basis and other non-segment expenses, predominantly general and administrative, stock compensation, finance and transaction expenses. Corporate and Investments also includes the activities of certain key executives such as the Chief Executive Officer and Chief Financial Officer. For reporting purposes, Corporate and Investments is reflected separately; however, it is not considered a reportable segment. The Company’s corporate expenses, capital servicing and debt costs and investment results are presented separately within the corporate and investments discussion.
The Company’s strategy is to concentrate primarily on short-tail risks, which has been an area where management believes prices and terms provide an attractive risk-adjusted return and the management team has proven expertise. The Company’s profitability in any given period is a function of net earned premium and investment revenues, less net losses and loss expenses, acquisition expenses and operating expenses. Financial results in the (re)insurance industry are influenced by the frequency and/or severity of claims and losses, including as a result of catastrophic events; changes in interest rates, financial markets and general economic conditions; the supply of (re)insurance capacity and changes in legal, regulatory and judicial environments.
Merger Agreement
On January 21, 2018, the Company entered into a definitive agreement and plan of merger (the “Merger Agreement”) with American International Group, Inc. (“AIG”). The Merger Agreement provides that, subject to the satisfaction or waiver of certain conditions set forth therein, the Company will merge with an existing AIG subsidiary in accordance with the Bermuda Companies Act (the “Merger”), with the Company surviving the Merger as a wholly–owned subsidiary of AIG (the “Surviving Company”).
Pursuant to the Merger Agreement, at the effective time of the Merger, holders of the Company’s common shares will be entitled to receive consideration of $68.00 in cash. Each of the Company’s issued and outstanding Series A and Series B Preferred Shares will remain issued and outstanding as a “Series A Preferred Share” and “Series B Preferred Share,” respectively, of the Surviving Company.
The Merger is expected to close in mid-2018, subject to the approval of the Company’s shareholders, regulatory approvals and other customary closing conditions. The Merger Agreement permits the Company to pay out regular quarterly cash dividends not to exceed $0.38 per common share, with its quarterly dividend for the second fiscal quarter for 2018 to be paid prior to the closing of the Merger even if such closing occurs prior to the regular record or payment date of such dividend.
Business Outlook and Trends
We underwrite global property (re)insurance and have large aggregate exposures to natural and man-made disasters. The occurrence of claims from catastrophic events results in substantial volatility, and can have material adverse effects on the Company’s financial condition and results and its ability to write new business. This volatility affects results for the period in which the loss occurs because U.S. GAAP does not permit (re)insurers to reserve for such catastrophic events until they occur. Catastrophic events of significant magnitude historically have been relatively infrequent, although management believes the property catastrophe reinsurance market has experienced a higher level of worldwide catastrophic losses in terms of both frequency and severity in the period from 1992 to the present. We also expect that increases in the values and concentrations of insured property will increase the severity of such occurrences in the future. The Company seeks to reflect these types of trends when pricing contracts.
Property and other reinsurance premiums have historically risen in the aftermath of significant catastrophic losses. As loss reserves are established, industry surplus is depleted and the industry’s capacity to write new business diminishes. The global property and casualty (re)insurance industry has historically been highly cyclical. Since 2007, increased capital and the absence of significant catastrophic events resulted in a softening of rates on most lines. From 2010 to 2012, there was an increased level of catastrophe activity, principally the Chilean earthquake, Deepwater Horizon, the Tohoku earthquake, the New Zealand earthquakes and Superstorm Sandy; however, the impact of these events in the aggregate were not severe enough to increase rates. As such, the Company continued to see increased competition and decreased premium rates in most classes of business.
Following the significant catastrophic events of 2017: Hurricanes Harvey, Irma and Maria and the Northern and Southern California Wildfires, the Company expects the industry to see rate increases across all loss affected classes, some of which are noted in the renewal commentary below. However, the Company expects rate changes to be driven by the retrocession market, with reinsurers and insurers following accordingly; therefore, the full extent of rate increases will not likely be realized until mid-year 2018.
The following table presents the Reinsurance and Asset Management segments’ January 2018 and 2017 reinsurance renewals by Catastrophe XOL, Per Risk XOL and Proportional premiums:

47

 
 
Reinsurance and Asset Management segment's combined premium
(Dollars in thousands)
 
Catastrophe XOL
 
Per Risk XOL
 
Proportional
 
Total
2018
 
$
545,536

 
$
65,740

 
$
309,923

 
$
921,199

2017
 
$
380,870

 
$
66,016

 
$
203,548

 
$
650,434

Increase (decrease)
 
43.2
%
 
(0.4
)%
 
52.3
%
 
41.6
%
The following tables present the Reinsurance and Asset Management segments' January 2018 and 2017 reinsurance renewals by line of business:
 
 
Reinsurance segment premium
 
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
(Dollars in thousands)
 
U.S.
 
International
 
 
 
2018
 
$
147,152

 
$
119,588

 
$
262,444

 
$
117,616

 
$
646,800

2017
 
$
107,364

 
$
103,298

 
$
231,149

 
$
45,383

 
$
487,194

Increase
 
37.1
%
 
15.8
%
 
13.5
 %
 
159.2
%
 
32.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset Management segment premium
 
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
(Dollars in thousands)
 
U.S.
 
International
 
 
 
2018
 
$
242,684

 
$
27,467

 
$
4,248

 
$
—

 
$
274,399

2017
 
$
136,574

 
$
21,538

 
$
5,128

 
$
—

 
$
163,240

Increase (decrease)
 
77.7
%
 
27.5
%
 
(17.2
)%
 
—
%
 
68.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Reinsurance and Asset Management segments’ combined premium
 
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
(Dollars in thousands)
 
U.S.
 
International
 
 
 
2018
 
$
389,836

 
$
147,055

 
$
266,692

 
$
117,616

 
$
921,199

2017
 
$
243,938

 
$
124,836

 
$
236,277

 
$
45,383

 
$
650,434

Increase
 
59.8
%
 
17.8
%
 
12.9
 %
 
159.2
%
 
41.6
%
During the January 2018 renewal season, the Reinsurance segment underwrote $646.8 million in gross premiums written (excluding agriculture premiums), an increase of $159.6 million, or 32.8% from the 2017 renewal season. The increase was primarily driven by:
◦
An increase in the specialty - other lines of $72.2 million, or 159.2% as a result of the continued build out of the Company’s casualty portfolio and the timing of renewals; and
◦
An increase in U.S. property renewals of $39.8 million, or 37.1% driven by rate increases and significant premium growth on a few lines where the Company participated with large gross positions and managed its net exposure through strategic retrocession purchases.
The Asset Management segment underwrote $274.4 million in gross premiums written during the January 2018 renewal season, an increase of $111.2 million, or 68.1% from the 2017 renewal season. The increase was primarily driven by significant rate increases in the retrocession component of the portfolio and an increase in assets under management.
Business written by the Insurance segment is distributed evenly throughout the year. Through December 31, 2017, the Insurance segment experienced a whole account rate decrease of 2.5% on business written through the Talbot Syndicate, primarily driven by decreases in the downstream and upstream energy classes, and a modest whole account rate decrease of 0.5% on business written through Western World.

48

Non-GAAP Financial Measures
In presenting the Company’s results, management has included and discussed certain non-GAAP financial measures. The Company believes that these non-GAAP measures, which may be defined and calculated differently by other companies, better explain and enhance the understanding of the Company’s results of operations. However, these measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP.
Book value financial indicators
In addition to presenting book value per common share determined in accordance with U.S. GAAP, the Company believes that the key financial indicator for evaluating our performance and measuring the overall growth in value generated for shareholders is book value per diluted common share plus accumulated dividends, a non-GAAP financial measure.
The following table presents reconciliations of book value per common share to book value per diluted common share plus accumulated dividends and other non-GAAP book value financial indicators:
 
December 31, 2017
 
Equity Amount
 
Common Shares
 
Per Share
Amount (a)
Book value per common share (b)
$
3,495,072

 
79,319,550

 
$
44.06

Non-GAAP Adjustments:
 
 
 
 
 
Unvested restricted shares
—

 
2,503,859

 
 
Book value per diluted common share (e)
3,495,072

 
81,823,409

 
$
42.71

Goodwill
(229,573
)
 
—

 
 
Intangible assets
(171,411
)
 
—

 
 
Tangible book value per diluted common share (e)
$
3,094,088

 
81,823,409

 
$
37.81

 
 
 
 
 
 
Book value per diluted common share (e)
 
 
 
 
$
42.71

Accumulated dividends
 
 
 
 
13.08

Book value per diluted common share plus accumulated dividends (e)
 
 
 
 
$
55.79

 
December 31, 2016
 
Equity Amount
 
Common Shares
 
Per Share
Amount (a)
Book value per common share (b)
$
3,688,291

 
79,132,252

 
$
46.61

Non-GAAP Adjustments:
 
 
 
 
 
Assumed exercise of outstanding stock options (c)(d)
614

 
26,136

 
 
Unvested restricted shares
—

 
2,868,610

 
 
Book value per diluted common share (e)
3,688,905

 
82,026,998

 
$
44.97

Goodwill
(196,758
)
 
—

 
 
Intangible assets
(115,592
)
 
—

 
 
Tangible book value per diluted common share (e)
$
3,376,555

 
82,026,998

 
$
41.16

 
 
 
 
 
 
Book value per diluted common share (e)
 
 
 
 
$
44.97

Accumulated dividends
 
 
 
 
11.56

Book value per diluted common share plus accumulated dividends (e)
 
 
 
 
$
56.53

(a)
Per share amounts are calculated by dividing the equity amount by the common shares.
(b)
The equity amount used in the calculation of book value per common share represents total shareholders' equity available to Validus excluding the liquidation value of the preferred shares.
(c)
Using the "as-if-converted" method, assuming all proceeds received upon exercise of stock options will be retained by the Company and the resulting common shares from exercise remain outstanding.
(d)
At December 31, 2017, the weighted average exercise price for those stock options that had an exercise price lower than book value per share was $nil (December 31, 2016: $23.48).
(e)
Non-GAAP financial measure.
Book value per common share, a GAAP financial measure, decreased by $2.55, or 5.5%, from $46.61 at December 31, 2016 to $44.06 at December 31, 2017.

49

Book value per diluted common share plus accumulated dividends, a non-GAAP financial measure, is considered by management to be the key financial indicator of performance, as the Company believes growth in book value on a diluted basis, plus the dividends that have accumulated, ultimately translates into the return that a shareholder will receive. Book value per diluted common share plus accumulated dividends decreased by $0.74, or 1.3%, from $56.53 at December 31, 2016 to $55.79 at December 31, 2017. Cash dividends per common share are an integral part of the value created for shareholders. During the year ended December 31, 2017, the Company paid cash dividends of $1.52 (2016: $1.40) per common share.
Book value per diluted common share, a non-GAAP financial measure, is considered by management to be a measure of returns to common shareholders, as the Company believes growth in book value on a diluted basis ultimately translates into growth in stock price. Book value per diluted common share after dividends paid decreased by $2.26, or 5.0%, from $44.97 at December 31, 2016 to $42.71 at December 31, 2017.
The change in book value per diluted common share inclusive of dividends paid was (1.6)% and 9.5% for the years ended December 31, 2017 and 2016, respectively.
Tangible book value per diluted common share, a non-GAAP financial measure, is considered by management to be a measure of returns to common shareholders excluding goodwill and other intangible assets, as the Company believes growth in tangible book value on a diluted basis ultimately translates into growth in the tangible value of the Company. Tangible book value per diluted common share decreased by $3.35, or 8.1%, from $41.16 at December 31, 2016 to $37.81 at December 31, 2017.
Other financial indicators
In addition to presenting net (loss) income (attributable) available to Validus common shareholders determined in accordance with U.S. GAAP, the Company believes that showing net operating income (loss) available (attributable) to Validus common shareholders, a non-GAAP financial measure, provides investors with a valuable measure of profitability and enables investors, analysts, rating agencies and other users of its financial information to more easily analyze the Company’s results in a manner similar to how management analyzes the Company’s underlying business performance.
Net operating income (loss) available (attributable) to Validus common shareholders is calculated by the addition or subtraction of certain Consolidated Statement of (Loss) Income and Comprehensive (Loss) Income line items from net (loss) income (attributable) available to Validus common shareholders, the most directly comparable GAAP financial measure, as illustrated in the table below:
 
Three Months Ended December 31,
 
Years Ended December 31,
 
2017
 
2016
 
2017
 
2016
 
2015
Net (loss) income (attributable) available to Validus common shareholders
$
(8,693
)
 
$
7,767

 
$
(63,483
)
 
$
359,384

 
$
374,893

Non-GAAP Adjustments:
 
 
 
 
 
 
 
 
 
Net realized (gains) on investments
(5,607
)
 
(9,220
)
 
(7,623
)
 
(15,757
)
 
(2,298
)
Change in net unrealized losses (gains) on investments
21,257

 
67,460

 
(3,215
)
 
(16,871
)
 
32,395

(Income) loss from investment affiliates
(6,345
)
 
(2,166
)
 
(22,010
)
 
2,083

 
(4,281
)
Foreign exchange losses (gains)
283

 
901

 
7,447

 
(10,864
)
 
8,731

Other (income) loss
—

 
(7
)
 
(303
)
 
766

 
1,002

Transaction expenses
—

 
—

 
4,427

 
—

 
—

Net income (loss) attributable to noncontrolling interests
4,597

 
(412
)
 
(767
)
 
457

 
(693
)
Tax (benefit) expense (a)
(1,339
)
 
(5,863
)
 
521

 
1,687

 
384

Net operating income (loss) available (attributable) to Validus common shareholders (b)
$
4,153

 
$
58,460

 
$
(85,006
)
 
$
320,885

 
$
410,133

 
 
 
 
 
 
 
 
 
 
Average shareholders' equity available to Validus common shareholders (c)
$
3,515,680

 
$
3,702,956

 
$
3,658,591

 
$
3,697,114

 
$
3,641,920

 
 
 
 
 
 
 
 
 
 
Annualized return on average equity
(1.0
%)
 
0.8
%
 
(1.7
%)
 
9.7
%
 
10.3
%
Annualized net operating return on average equity (b)
0.5
%
 
6.3
%
 
(2.3
%)
 
8.7
%
 
11.3
%
(a)
Represents the tax expense or benefit associated with the specific country to which the pre-tax adjustment relates to. The tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the ability to utilize tax losses carried forward.
(b)
Non-GAAP financial measure.
(c)
Average shareholders’ equity for the three months ended is the average of the beginning and ending quarter end shareholders’ equity balances, excluding the liquidation value of the preferred shares. Average shareholders’ equity for the year ended is the average of the beginning, ending and intervening quarter end shareholders’ equity balances, excluding the liquidation value of the preferred shares.

50

Net operating income (loss) available (attributable) to Validus common shareholders, a non-GAAP financial measure, measures the performance of the Company’s operations without the influence of gains or losses on investments and foreign currencies and other items as noted in the table above. The Company excludes these items from its calculation of net operating income (loss) available (attributable) to Validus common shareholders because the amount of these gains and losses is heavily influenced by, and fluctuates in part, according to availability of investment market opportunities and other factors. The Company believes these amounts are largely independent of its core underwriting activities and including them distorts the analysis of trends in its operations. The Company believes the reporting of net operating income (loss) available (attributable) to Validus common shareholders enhances the understanding of results by highlighting the underlying profitability of the Company’s core (re)insurance operations. This profitability is influenced significantly by earned premium growth, adequacy of the Company’s pricing, as well as loss frequency and severity. Over time it is also influenced by the Company’s underwriting discipline, which seeks to manage exposure to loss through favorable risk selection and diversification, its management of claims, its use of reinsurance and its ability to manage its expense ratio, which it accomplishes through its management of acquisition costs and other underwriting expenses.
Return on average equity, a GAAP financial measure, and net operating return on average equity, a non-GAAP financial measure, represents the returns generated on common shareholders’ equity during the year. The Company’s objective is to generate superior returns on capital that appropriately reward shareholders for the risks assumed.
For further discussion of the components driving the Company’s financial indicators refer to the “Results of Operations” sections.

51

Fourth Quarter 2017 Results of Operations - Consolidated
The following table presents the results of operations for the three months ended December 31, 2017 and 2016:
 
 
Three Months Ended December 31,
(Dollars in thousands)
 
2017
 
2016
Revenues
 
 
 
 
Gross premiums written
 
$
443,323

 
$
339,454

Reinsurance premiums ceded
 
(96,445
)
 
(40,635
)
Net premiums written
 
346,878

 
298,819

Change in unearned premiums
 
304,599

 
241,580

Net premiums earned
 
651,477

 
540,399

Net investment income
 
48,960

 
38,153

Net realized gains on investments
 
5,607

 
9,220

Change in net unrealized losses on investments
 
(21,257
)
 
(67,460
)
Income from investment affiliates
 
6,345

 
2,166

Other insurance related income and other income
 
6,939

 
568

Foreign exchange losses
 
(283
)
 
(901
)
Total revenues
 
697,788

 
522,145

Expenses
 
 
 
 
Losses and loss expenses
 
479,842

 
275,126

Policy acquisition costs
 
127,067

 
120,889

General and administrative expenses
 
97,522

 
77,955

Share compensation expenses
 
10,031

 
10,442

Finance expenses
 
15,871

 
14,630

Total expenses
 
730,333

 
499,042

(Loss) income before taxes and (income) attributable to AlphaCat investors
 
(32,545
)
 
23,103

Tax benefit
 
412

 
21,147

(Income) attributable to AlphaCat investors
 
(37,868
)
 
(7,080
)
Net (loss) income
 
(70,001
)
 
37,170

Net loss (income) attributable to noncontrolling interests
 
67,136

 
(27,200
)
Net (loss) income (attributable) available to Validus
 
(2,865
)
 
9,970

Dividends on preferred shares
 
(5,828
)
 
(2,203
)
Net (loss) income (attributable) available to Validus common shareholders
 
$
(8,693
)
 
$
7,767

 
 
 
 
 
Supplemental information:
 
 
 
 
Losses and loss expenses:
 
 
 
 
Current period excluding items below
 
$
392,278

 
$
269,301

Current period—notable loss events
 
120,774

 
52,310

Current period—non-notable loss events
 
9,738

 
302

Change in prior accident years
 
(42,948
)
 
(46,787
)
Total losses and loss expenses
 
$
479,842

 
$
275,126

Selected ratios:
 
 
 
 
Ratio of net to gross premiums written
 
78.2
 %
 
88.0
 %
Losses and loss expense ratio:
 
 
 
 
Current period excluding items below
 
60.3
 %
 
49.8
 %
Current period—notable loss events
 
18.5
 %
 
9.7
 %
Current period—non-notable loss events
 
1.5
 %
 
0.1
 %
Change in prior accident years
 
(6.6
)%
 
(8.7
)%
Losses and loss expense ratio
 
73.7
 %
 
50.9
 %
Policy acquisition cost ratio
 
19.5
 %
 
22.4
 %
General and administrative expense ratio
 
16.5
 %
 
16.3
 %
Expense ratio
 
36.0
 %
 
38.7
 %
Combined ratio
 
109.7
 %
 
89.6
 %



52

Highlights for the fourth quarter 2017 were as follows:
•
Gross premiums written for the three months ended December 31, 2017 were $443.3 million compared to $339.5 million for the three months ended December 31, 2016, an increase of $103.9 million, or 30.6%. The increase was primarily driven by an increase in the Insurance segment.
•
Reinsurance premiums ceded for the three months ended December 31, 2017 were $96.4 million compared to $40.6 million for the three months ended December 31, 2016, an increase of $55.8 million, or 137.3%. The increase was primarily driven by increases in the Reinsurance and Insurance segments.
•
Net premiums earned for the three months ended December 31, 2017 were $651.5 million compared to $540.4 million for the three months ended December 31, 2016, an increase of $111.1 million, or 20.6%. The increase was driven by increases in the Insurance and Reinsurance segments.
•
Losses and loss expenses for the three months ended December 31, 2017 were $479.8 million compared to $275.1 million for the three months ended December 31, 2016, an increase of $204.7 million or 74.4% and included the following:
Notable and Non-notable Loss Events
•
The Company defines a notable loss event as an event whereby consolidated net losses and loss expenses aggregate to a threshold greater than or equal to $30.0 million. The Company defines a non-notable loss event as an event whereby consolidated net losses and loss expenses aggregate to a threshold greater than or equal to $15.0 million but less than $30.0 million.
Notable Loss Events
•
Losses and loss expenses incurred during the three months ended December 31, 2017 from notable loss events were $120.8 million, or 18.5 percentage points of the loss ratio. Net of losses attributable to AlphaCat investors and noncontrolling interests of $78.0 million and including the net impact of reinstatement premiums and acceleration of unearned premiums of $2.2 million, the net loss attributable to Validus from 2017 notable loss events during the three months ended December 31, 2017 was $44.9 million and was incurred by event as follows:
 
 
Three Months Ended December 31, 2017
 
 
Notable Loss Events
(Dollars in thousands)
 
Hurricane Harvey
 
Hurricane Irma
 
Hurricane Maria
 
Northern California Wildfires
 
Southern California Wildfires
 
Total
Net losses and loss expenses
 
$
65,795

 
$
(60,414
)
 
$
(10,856
)
 
$
87,754

 
$
38,495

 
$
120,774

Net losses and loss expenses attributable to AlphaCat third party investors and noncontrolling interests
 
(69,996
)
 
67,262

 
6,125

 
(67,592
)
 
(13,837
)
 
(78,038
)
Validus’ share of net losses and loss expenses
 
(4,201
)
 
6,848

 
(4,731
)
 
20,162

 
24,658

 
42,736

Net impact on premiums earned (a)
 
12,594

 
(3,746
)
 
1,383

 
(8,024
)
 
—

 
2,207

Net loss attributable to Validus
 
$
8,393

 
$
3,102

 
$
(3,348
)
 
$
12,138

 
$
24,658

 
$
44,943

(a)
Net impact on premiums earned includes reinstatement premiums assumed and ceded and the net impact of accelerating unearned premiums assumed and ceded.
•
Losses and loss expenses incurred during the three months ended December 31, 2016 from notable loss events were $52.3 million, or 9.7 percentage points of the loss ratio. Net of losses attributable to AlphaCat investors and noncontrolling interests of $15.3 million and net reinstatement premiums assumed of $0.7 million, the net loss attributable to Validus from 2016 notable loss events during the three months ended December 31, 2016 was $36.3 million and was incurred by event as follows:
 
 
Three Months Ended December 31, 2016
 
 
Notable Loss Events
(Dollars in thousands)
 
Canadian Wildfires
 
Hurricane Matthew
 
2016 New Zealand Earthquake
 
Total
Net losses and loss expenses
 
$
(18,251
)
 
$
39,140

 
$
31,421

 
$
52,310

Net losses and loss expenses attributable to AlphaCat third party investors and noncontrolling interests
 
2,726

 
(8,943
)
 
(9,068
)
 
(15,285
)
Validus’ share of net losses and loss expenses
 
(15,525
)
 
30,197

 
22,353

 
37,025

Reinstatement premiums, net
 
2,136

 
(2,781
)
 
(65
)
 
(710
)
Net loss attributable to Validus
 
$
(13,389
)
 
$
27,416

 
$
22,288

 
$
36,315


53

Non-notable Loss Events
•
There were no non-notable loss events occurring during the three months ended December 31, 2017. However, as a result of loss events occurring in the fourth quarter, the Company reallocated retrocession recoveries between all 2017 loss events. As such, the Company increased its net loss estimate on the third quarter 2017 Mexico City Earthquake which caused this event to exceed the $15.0 million threshold and become a non-notable loss event. Net losses and loss expenses incurred from the Mexico City Earthquake non-notable loss event were $9.7 million, or 1.5 percentage points of the loss ratio during the three months ended December 31, 2017 and $13.5 million, or 1.9 percentage points of the loss ratio during the three months ended September 30, 2017.
•
There were no non-notable loss events occurring during the three months ended December 31, 2016.
Attritional losses
•
Attritional losses of $392.3 million, or 60.3 percentage points of the loss ratio during the three months ended December 31, 2017 compared to $269.3 million, or 49.8 percentage points of the loss ratio during the three months ended December 31, 2016. The increase was primarily driven by the addition of CRS and a higher frequency of mid-size losses which did not meet the non-notable loss threshold.
Change in prior accident years
◦
Loss reserve development for the three months ended December 31, 2017 and 2016 was as follows:
 
 
Three Months Ended December 31,
(Dollars in thousands)
 
2017
 
2016
Adverse (favorable) development on event losses
 
$
1,150

 
$
(5,344
)
(Favorable) development on attritional losses
 
(44,098
)
 
(41,443
)
Change in prior accident years
 
$
(42,948
)
 
$
(46,787
)
The favorable development for the three months ended December 31, 2017 and 2016 was primarily driven by favorable development on attritional losses.
•
Loss ratio for the three months ended December 31, 2017 and 2016 was 73.7% and 50.9%, respectively, an increase of 22.8 percentage points.
◦
Loss ratios by line of business for the three months ended December 31, 2017 and 2016 were as follows:
 
Three Months Ended December 31,
 
2017
 
2016
Property
105.0
%
 
50.4
%
Specialty - Short-tail
54.3
%
 
45.9
%
Specialty - Other
61.9
%
 
60.8
%
All lines
73.7
%
 
50.9
%
•
Policy acquisition cost ratio for the three months ended December 31, 2017 was 19.5% compared to 22.4% for the three months ended December 31, 2016, a decrease of 2.9 percentage points. The decrease was primarily driven by a decrease in the Insurance segment.
•
General and administrative (“G&A”) expenses for the three months ended December 31, 2017 were $97.5 million compared to $78.0 million for the three months ended December 31, 2016, an increase of $19.6 million or 25.1%. The increase was primarily driven by an increase in the Insurance and Reinsurance segments.
•
Combined ratio for the three months ended December 31, 2017 and 2016 was 109.7% and 89.6%, respectively, an increase of 20.1 percentage points.


54

Fourth Quarter 2017 Results of Operations - Reinsurance Segment
The following table presents underwriting results by line of business for the three months ended December 31, 2017 and 2016:
 
 
Three Months Ended December 31,
 
 
2017
 
2016
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
 Total
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
18,126

 
$
12,997

 
$
20,837

 
$
51,960

 
$
8,479

 
$
(8,763
)
 
$
42,097

 
$
41,813

Reinsurance premiums ceded
 
(32,778
)
 
(8,059
)
 
121

 
(40,716
)
 
706

 
(8,447
)
 
(32
)
 
(7,773
)
Net premiums written
 
(14,652
)
 
4,938

 
20,958

 
11,244

 
9,185

 
(17,210
)
 
42,065

 
34,040

Change in unearned premiums
 
113,643

 
111,487

 
14,190

 
239,320

 
92,397

 
130,100

 
(22,368
)
 
200,129

Net premiums earned
 
98,991

 
116,425

 
35,148

 
250,564

 
101,582

 
112,890

 
19,697

 
234,169

Other insurance related income
 
 
 
 
 
 
 
15

 
 
 
 
 
 
 
9

Total underwriting revenues
 
 
 
 
 
 
 
250,579

 
 
 
 
 
 
 
234,178

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
60,644

 
54,494

 
20,666

 
135,804

 
38,381

 
46,098

 
9,024

 
93,503

Policy acquisition costs
 
17,976

 
27,508

 
12,623

 
58,107

 
17,611

 
30,840

 
6,901

 
55,352

Total underwriting deductions before G&A
 
78,620

 
82,002

 
33,289

 
193,911

 
55,992

 
76,938

 
15,925

 
148,855

Underwriting income before G&A
 
$
20,371

 
$
34,423

 
$
1,859

 
$
56,668

 
$
45,590

 
$
35,952

 
$
3,772

 
$
85,323

General and administrative expenses
 
 
 
 
 
 
 
23,604

 
 
 
 
 
 
 
21,248

Share compensation expenses
 
 
 
 
 
 
 
2,331

 
 
 
 
 
 
 
2,811

Total underwriting deductions
 
 
 
 
 
 
 
219,846

 
 
 
 
 
 
 
172,914

Underwriting income
 
 
 
 
 
 
 
$
30,733

 
 
 
 
 
 
 
$
61,264

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
$
38,881

 
$
70,334

 
$
23,704

 
$
132,919

 
$
26,918

 
$
72,065

 
$
10,792

 
$
109,775

Current period—notable loss events
 
14,900

 
(162
)
 
—

 
14,738

 
16,679

 
1,920

 
—

 
18,599

Current period—non-notable loss events
 
8,818

 
574

 
—

 
9,392

 
(1
)
 
2

 
—

 
1

Change in prior accident years
 
(1,955
)
 
(16,252
)
 
(3,038
)
 
(21,245
)
 
(5,215
)
 
(27,889
)
 
(1,768
)
 
(34,872
)
Total losses and loss expenses
 
$
60,644

 
$
54,494

 
$
20,666

 
$
135,804

 
$
38,381

 
$
46,098

 
$
9,024

 
$
93,503

Selected ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
(80.8
)%
 
38.0
 %
 
100.6
 %
 
21.6
 %
 
108.3
 %
 
196.4
 %
 
99.9
 %
 
81.4
 %
Losses and loss expense ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
39.2
 %
 
60.4
 %
 
67.4
 %
 
53.1
 %
 
26.5
 %
 
63.8
 %
 
54.8
 %
 
46.9
 %
Current period—notable loss events
 
15.1
 %
 
(0.1
)%
 
—
 %
 
5.9
 %
 
16.4
 %
 
1.7
 %
 
—
 %
 
7.9
 %
Current period—non-notable loss events
 
8.9
 %
 
0.5
 %
 
—
 %
 
3.7
 %
 
—
 %
 
—
 %
 
—
 %
 
—
 %
Change in prior accident years
 
(2.0
)%
 
(14.0
)%
 
(8.6
)%
 
(8.5
)%
 
(5.1
)%
 
(24.7
)%
 
(9.0
)%
 
(14.9
)%
Losses and loss expense ratio
 
61.2
 %
 
46.8
 %
 
58.8
 %
 
54.2
 %
 
37.8
 %
 
40.8
 %
 
45.8
 %
 
39.9
 %
Policy acquisition cost ratio
 
18.2
 %
 
23.6
 %
 
35.9
 %
 
23.2
 %
 
17.3
 %
 
27.3
 %
 
35.0
 %
 
23.6
 %
General and administrative expense ratio
 
 
 
 
 
 
 
10.4
 %
 
 
 
 
 
 
 
10.3
 %
Expense ratio
 
 
 
 
 
 
 
33.6
 %
 
 
 
 
 
 
 
33.9
 %
Combined ratio
 
 
 
 
 
 
 
87.8
 %
 
 
 
 
 
 
 
73.8
 %



55

Highlights for the fourth quarter 2017 were as follows:
•
Gross premiums written for the three months ended December 31, 2017 were $52.0 million compared to $41.8 million for the three months ended December 31, 2016, an increase of $10.1 million, or 24.3% and included the following:
◦
Property premiums of $18.1 million during the three months ended December 31, 2017, compared to $8.5 million during the three months ended December 31, 2016, an increase of $9.6 million, or 113.8%, primarily driven by premium adjustments on existing business;
◦
Specialty - short-tail premiums of $13.0 million during the three months ended December 31, 2017, compared to $(8.8) million during the three months ended December 31, 2016, an increase of $21.8 million, or 248.3%. The increase was primarily driven by favorable premium adjustments on Agriculture business during the three months ended December 31, 2017 compared to unfavorable adjustments during the same period in 2016; and
◦
Specialty - other premiums of $20.8 million during the three months ended December 31, 2017, compared to $42.1 million during the three months ended December 31, 2016, a decrease of $21.3 million, or 50.5%. The decrease was primarily driven by the timing of renewals in the casualty class of business.
•
Reinsurance premiums ceded for the three months ended December 31, 2017 were $40.7 million compared to $7.8 million for the three months ended December 31, 2016, an increase of $32.9 million. The increase was primarily driven by an increase in the property lines of $33.5 million as a result of new retrocession cover purchased from Tailwind Re, the first Validus-sponsored catastrophe bond.
•
Net premiums earned for the three months ended December 31, 2017 were $250.6 million compared to $234.2 million for the three months ended December 31, 2016, an increase of $16.4 million, or 7.0%. The increase was primarily driven by ongoing growth in the specialty - other lines of business over the last two years.
•
Losses and loss expenses for the three months ended December 31, 2017 were $135.8 million compared to $93.5 million for the three months ended December 31, 2016, an increase of $42.3 million or 45.2% and included the following:
Notable Loss Events
•
Losses and loss expenses incurred during the three months ended December 31, 2017 from notable loss events were $14.7 million, or 5.9 percentage points of the loss ratio and included losses from fourth quarter 2017 notable loss events of $23.9 million, or 9.5 percentage points of the loss ratio, partially offset by favorable development on third quarter 2017 notable loss events of $9.2 million or 3.6 percentage points of the loss ratio. Net of reinstatement premiums and the acceleration of unearned premiums of $1.2 million, the net loss attributable to the Reinsurance segment from 2017 notable loss events during the three months ended December 31, 2017 was $13.5 million and was incurred by event as follows:
 
 
Three Months Ended December 31, 2017
 
 
Notable Loss Events
(Dollars in thousands)
 
Hurricane Harvey
 
Hurricane Irma
 
Hurricane Maria
 
Northern California Wildfires
 
Southern California Wildfires
 
Total
Net losses and loss expenses
 
$
(7,090
)
 
$
4,321

 
$
(6,363
)
 
$
4,762

 
$
19,108

 
$
14,738

Net impact on premiums earned (a)
 
8,761

 
(2,483
)
 
504

 
(8,024
)
 
—

 
(1,242
)
Net loss attributable to Reinsurance segment
 
$
1,671

 
$
1,838

 
$
(5,859
)
 
$
(3,262
)
 
$
19,108

 
$
13,496

(a)
Net impact on premiums earned includes reinstatement premiums assumed and the net impact of accelerating unearned premiums assumed and ceded.
Net losses and loss expenses from the 2017 notable loss events by line of business were as follows:
 
 
Three Months Ended December 31, 2017
 
 
Notable Loss Events
(Dollars in thousands)
 
Hurricane Harvey
 
Hurricane Irma
 
Hurricane Maria
 
Northern California Wildfires
 
Southern California Wildfires
 
Total
Property
 
$
(7,056
)
 
$
3,929

 
$
(5,843
)
 
$
4,762

 
$
19,108

 
$
14,900

Specialty - Short-tail
 
(34
)
 
392

 
(520
)
 
—

 
—

 
(162
)
Specialty - Other
 
—

 
—

 
—

 
—

 
—

 
—

Net losses and loss expenses
 
$
(7,090
)
 
$
4,321

 
$
(6,363
)
 
$
4,762

 
$
19,108

 
$
14,738



56

•
Losses and loss expenses incurred during the three months ended December 31, 2016 from notable loss events were $18.6 million, or 7.9 percentage points of the loss ratio. Including the impact of net reinstatement premiums ceded of $0.7 million, the net loss attributable to the Reinsurance segment from 2016 notable loss events during the three months ended December 31, 2016 was $19.3 million and was incurred by event as follows:
 
 
Three Months Ended December 31, 2016
 
 
Notable Loss Events
(Dollars in thousands)
 
Canadian Wildfires
 
Hurricane Matthew
 
2016 New Zealand Earthquake
 
Total
Net losses and loss expenses
 
$
(14,381
)
 
$
14,078

 
$
18,902

 
$
18,599

Reinstatement premiums, net
 
(2,130
)
 
2,794

 
64

 
728

Net loss attributable to Reinsurance segment
 
$
(16,511
)
 
$
16,872

 
$
18,966

 
$
19,327

Net losses and loss expenses from the 2016 notable loss events by line of business were as follows:
 
 
Three Months Ended December 31, 2016
 
 
Notable Loss Events
(Dollars in thousands)
 
Canadian Wildfires
 
Hurricane Matthew
 
2016 New Zealand Earthquake
 
Total
Property
 
$
(14,381
)
 
$
12,158

 
$
18,902

 
$
16,679

Specialty - Short-tail
 
—

 
1,920

 
—

 
1,920

Specialty - Other
 
—

 
—

 
—

 
—

Net losses and loss expenses
 
$
(14,381
)
 
$
14,078

 
$
18,902

 
$
18,599

Non-notable Loss Events
•
Losses and loss expenses incurred during the three months ended December 31, 2017 from non-notable loss events were $9.4 million, or 3.7 percentage points of the loss ratio. The non-notable losses were driven by adverse development on the third quarter 2017 Mexico City Earthquake loss event due to the reallocation of retrocession recoveries and related primarily to the property lines. Including the impact of net reinstatement premiums ceded of $0.7 million, the net loss attributable to the Reinsurance segment was $10.1 million.
•
There were no non-notable loss events occurring during the three months ended December 31, 2016.
Attritional losses
•
Attritional losses of $132.9 million, or 53.1 percentage points of the loss ratio during the three months ended December 31, 2017 compared to $109.8 million, or 46.9 percentage points of the loss ratio during the three months ended December 31, 2016. The increase was primarily due to a single mid-size loss which did not meet the non-notable loss threshold.
Change in prior accident years
◦
Loss reserve development for the three months ended December 31, 2017 and 2016 was as follows:
 
 
Three Months Ended December 31, 2017
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
Adverse (favorable) development on event losses
 
$
492

 
$
319

 
$
(492
)
 
$
319

(Favorable) development on attritional losses
 
(2,447
)
 
(16,571
)
 
(2,546
)
 
(21,564
)
Change in prior accident years
 
$
(1,955
)
 
$
(16,252
)
 
$
(3,038
)
 
$
(21,245
)
 
 
Three Months Ended December 31, 2016
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
(Favorable) development on event losses
 
$
(3,407
)
 
$
(1,141
)
 
$
(17
)
 
$
(4,565
)
(Favorable) development on attritional losses
 
(1,808
)
 
(26,748
)
 
(1,751
)
 
(30,307
)
Change in prior accident years
 
$
(5,215
)
 
$
(27,889
)
 
$
(1,768
)
 
$
(34,872
)
The net favorable development for the three months ended December 31, 2017 and 2016 was primarily driven by favorable development on attritional losses.

57

•
Loss ratio for the three months ended December 31, 2017 and 2016 was 54.2% and 39.9%, respectively, an increase of 14.3 percentage points.
•
Policy acquisition cost ratio for the three months ended December 31, 2017 was 23.2% compared to 23.6% for the three months ended December 31, 2016, a decrease of 0.4 percentage points.
•
General and administrative expenses for the three months ended December 31, 2017 were $23.6 million compared to $21.2 million for the three months ended December 31, 2016, an increase of $2.4 million or 11.1%. The increase in general and administrative expenses was primarily driven by a higher allocation of costs to the segment during the three months ended December 31, 2017.
•
Combined ratio for the three months ended December 31, 2017 and 2016 was 87.8% and 73.8%, respectively, an increase of 14.0 percentage points.
•
Underwriting income for the three months ended December 31, 2017 was $30.7 million compared to $61.3 million for the three months ended December 31, 2016, a decrease of $30.5 million or 49.8%.


58

Fourth Quarter 2017 Results of Operations - Insurance Segment
The following table presents underwriting results by line of business for the three months ended December 31, 2017 and 2016:
 
 
Three Months Ended December 31,
 
 
2017
 
2016
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
 Total
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
105,005

 
$
155,233

 
$
116,776

 
$
377,014

 
$
96,225

 
$
86,568

 
$
115,112

 
$
297,905

Reinsurance premiums ceded
 
(30,954
)
 
(14,924
)
 
(10,500
)
 
(56,378
)
 
(18,065
)
 
(6,350
)
 
(8,447
)
 
(32,862
)
Net premiums written
 
74,051

 
140,309

 
106,276

 
320,636

 
78,160

 
80,218

 
106,665

 
265,043

Change in unearned premiums
 
(8,986
)
 
23,026

 
(1,647
)
 
12,393

 
(7,184
)
 
(2,585
)
 
(15,131
)
 
(24,900
)
Net premiums earned
 
65,065

 
163,335

 
104,629

 
333,029

 
70,976

 
77,633

 
91,534

 
240,143

Other insurance related income
 
 
 
 
 
 
 
3,957

 
 
 
 
 
 
 
284

Total underwriting revenues
 
 
 
 
 
 
 
336,986

 
 
 
 
 
 
 
240,427

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
80,935

 
98,083

 
65,890

 
244,908

 
63,502

 
42,274

 
58,641

 
164,417

Policy acquisition costs
 
16,008

 
22,010

 
22,385

 
60,403

 
13,836

 
23,401

 
21,157

 
58,394

Total underwriting deductions before G&A
 
96,943

 
120,093

 
88,275

 
305,311

 
77,338

 
65,675

 
79,798

 
222,811

Underwriting (loss) income before G&A
 
$
(31,878
)
 
$
43,242

 
$
16,354

 
$
31,675

 
$
(6,362
)
 
$
11,958

 
$
11,736

 
$
17,616

General and administrative expenses
 
 
 
 
 
 
 
64,945

 
 
 
 
 
 
 
33,069

Share compensation expenses
 
 
 
 
 
 
 
3,512

 
 
 
 
 
 
 
3,693

Total underwriting deductions
 
 
 
 
 
 
 
373,768

 
 
 
 
 
 
 
259,573

Underwriting (loss)
 
 
 
 
 
 
 
$
(36,782
)
 
 
 
 
 
 
 
$
(19,146
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
$
66,150

 
$
102,135

 
$
77,667

 
$
245,952

 
$
57,262

 
$
39,791

 
$
60,231

 
$
157,284

Current period—notable loss events
 
21,189

 
62

 
(334
)
 
20,917

 
14,208

 
3,358

 
164

 
17,730

Current period—non-notable loss events
 
(1,526
)
 
(750
)
 
—

 
(2,276
)
 
193

 
(4
)
 
—

 
189

Change in prior accident years
 
(4,878
)
 
(3,364
)
 
(11,443
)
 
(19,685
)
 
(8,161
)
 
(871
)
 
(1,754
)
 
(10,786
)
Total losses and loss expenses
 
$
80,935

 
$
98,083

 
$
65,890

 
$
244,908

 
$
63,502

 
$
42,274

 
$
58,641

 
$
164,417

Selected ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
70.5
 %
 
90.4
 %
 
91.0
 %
 
85.0
 %
 
81.2
 %
 
92.7
 %
 
92.7
 %
 
89.0
 %
Losses and loss expense ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
101.6
 %
 
62.6
 %
 
74.2
 %
 
73.8
 %
 
80.7
 %
 
51.3
 %
 
65.8
 %
 
65.5
 %
Current period—notable loss events
 
32.6
 %
 
—
 %
 
(0.3
)%
 
6.3
 %
 
20.0
 %
 
4.3
 %
 
0.2
 %
 
7.4
 %
Current period—non-notable loss events
 
(2.3
)%
 
(0.5
)%
 
—
 %
 
(0.7
)%
 
0.3
 %
 
—
 %
 
—
 %
 
0.1
 %
Change in prior accident years
 
(7.5
)%
 
(2.1
)%
 
(10.9
)%
 
(5.9
)%
 
(11.5
)%
 
(1.1
)%
 
(1.9
)%
 
(4.5
)%
Losses and loss expense ratio
 
124.4
 %
 
60.0
 %
 
63.0
 %
 
73.5
 %
 
89.5
 %
 
54.5
 %
 
64.1
 %
 
68.5
 %
Policy acquisition cost ratio
 
24.6
 %
 
13.5
 %
 
21.4
 %
 
18.1
 %
 
19.5
 %
 
30.1
 %
 
23.1
 %
 
24.3
 %
General and administrative expense ratio
 
 
 
 
 
 
 
20.6
 %
 
 
 
 
 
 
 
15.3
 %
Expense ratio
 
 
 
 
 
 
 
38.7
 %
 
 
 
 
 
 
 
39.6
 %
Combined ratio
 
 
 
 
 
 
 
112.2
 %
 
 
 
 
 
 
 
108.1
 %



59

Highlights for the fourth quarter 2017 were as follows:
•
Gross premiums written for the three months ended December 31, 2017 were $377.0 million compared to $297.9 million for the three months ended December 31, 2016, an increase of $79.1 million, or 26.6% and included the following:
◦
Property premiums of $105.0 million during the three months ended December 31, 2017, compared to $96.2 million during the three months ended December 31, 2016, an increase of $8.8 million, or 9.1%. The increase was primarily driven by the continued build out of product offerings in the U.S. short-tail property lines;
◦
Specialty - short-tail premiums of $155.2 million during the three months ended December 31, 2017, compared to $86.6 million during the three months ended December 31, 2016, an increase of $68.7 million, or 79.3%. The increase was primarily driven by new agriculture business written through CRS; and
◦
Specialty - other premiums of $116.8 million during the three months ended December 31, 2017, compared to $115.1 million during the three months ended December 31, 2016, an increase of $1.7 million, or 1.4%.
•
Reinsurance premiums ceded for the three months ended December 31, 2017 were $56.4 million compared to $32.9 million for the three months ended December 31, 2016, an increase of $23.5 million, or 71.6%, primarily driven by increases in the property and specialty - short-tail lines of $12.9 million and $8.6 million, respectively. The increase in the property lines was primarily driven by the growth in gross premiums written as noted above and new reinsurance cover purchased from Tailwind Re. The increase in the specialty - short-tail lines was due to an increase in ceded agriculture premiums relating to new business written through CRS.
•
Net premiums earned for the three months ended December 31, 2017 were $333.0 million compared to $240.1 million for the three months ended December 31, 2016, an increase of $92.9 million, or 38.7%. The increase was primarily driven by an increase in the specialty - short-tail lines of $85.7 million due to agriculture net premiums earned relating to new business written through CRS.
•
Losses and loss expenses for the three months ended December 31, 2017 were $244.9 million compared to $164.4 million for the three months ended December 31, 2016, an increase of $80.5 million or 49.0% and included the following:
Notable Loss Events
•
Losses and loss expenses incurred during the three months ended December 31, 2017 from notable loss events were $20.9 million, or 6.3 percentage points of the loss ratio and included losses from fourth quarter 2017 notable loss events of $14.6 million, or 4.4 percentage points of the loss ratio, and losses from third quarter 2017 notable loss events of $6.3 million, or 1.9 percentage points of the loss ratio. Including the impact of net reinstatement premiums ceded of $4.2 million, the net loss attributable to the Insurance segment from 2017 notable loss events during the three months ended December 31, 2017 was $25.1 million and was incurred by event as follows:
 
 
Three Months Ended December 31, 2017
 
 
Notable Loss Events
(Dollars in thousands)
 
Hurricane Harvey
 
Hurricane Irma
 
Hurricane Maria
 
Northern California Wildfires
 
Southern California Wildfires
 
Total
Net losses and loss expenses
 
$
(592
)
 
$
4,147

 
$
2,725

 
$
10,250

 
$
4,387

 
$
20,917

Net impact on premiums earned (a)
 
3,833

 
(498
)
 
879

 
—

 
—

 
4,214

Net loss attributable to Insurance segment
 
$
3,241

 
$
3,649

 
$
3,604

 
$
10,250

 
$
4,387

 
$
25,131

(a)
Net impact on premiums earned includes reinstatement premiums assumed and ceded.
Net losses and loss expenses from the 2017 notable loss events by line of business were as follows:
 
 
Three Months Ended December 31, 2017
 
 
Notable Loss Events
(Dollars in thousands)
 
Hurricane Harvey
 
Hurricane Irma
 
Hurricane Maria
 
Northern California Wildfires
 
Southern California Wildfires
 
Total
Property
 
$
(687
)
 
$
6,834

 
$
2,655

 
$
8,250

 
$
4,137

 
$
21,189

Specialty - Short-tail
 
313

 
(2,571
)
 
70

 
2,000

 
250

 
62

Specialty - Other
 
(218
)
 
(116
)
 
—

 
—

 
—

 
(334
)
Net losses and loss expenses
 
$
(592
)
 
$
4,147

 
$
2,725

 
$
10,250

 
$
4,387

 
$
20,917


60

•
Losses and loss expenses incurred during the three months ended December 31, 2016 from notable loss events were $17.7 million, or 7.4 percentage points of the loss ratio. Net of reinstatement premiums of $0.1 million, the net loss attributable to the Insurance segment from 2016 notable loss events during the three months ended December 31, 2016 was $17.6 million and was incurred by event as follows:
 
 
Three Months Ended December 31, 2016
 
 
Notable Loss Events
(Dollars in thousands)
 
Canadian Wildfires
 
Hurricane Matthew
 
2016 New Zealand Earthquake
 
Total
Net losses and loss expenses
 
$
241

 
$
15,239

 
$
2,250

 
$
17,730

Reinstatement premiums, net
 
(133
)
 
—

 
—

 
(133
)
Net loss attributable to Insurance segment
 
$
108

 
$
15,239

 
$
2,250

 
$
17,597

Net losses and loss expenses from the 2016 notable loss events by line of business were as follows:
 
 
Three Months Ended December 31, 2016
 
 
Notable Loss Events
(Dollars in thousands)
 
Canadian Wildfires
 
Hurricane Matthew
 
2016 New Zealand Earthquake
 
Total
Property
 
$
37

 
$
11,921

 
$
2,250

 
$
14,208

Specialty - Short-tail
 
204

 
3,154

 
—

 
3,358

Specialty - Other
 
—

 
164

 
—

 
164

Net losses and loss expenses
 
$
241

 
$
15,239

 
$
2,250

 
$
17,730

Non-notable Loss Events
•
Losses and loss expenses incurred during the three months ended December 31, 2017 from non-notable loss events were $(2.3) million, which benefited the loss ratio by 0.7 percentage points. The reduction in non-notable losses was driven by favorable development on the third quarter 2017 Mexico City Earthquake loss event and related primarily to the property lines.
•
There were no non-notable loss events occurring during the three months ended December 31, 2016.
Attritional losses
•
Attritional losses of $246.0 million, or 73.8 percentage points of the loss ratio during the three months ended December 31, 2017 compared to $157.3 million, or 65.5 percentage points of the loss ratio during the three months ended December 31, 2016. The increase was primarily driven by the addition of CRS and a higher frequency of mid-size losses which did not meet the non-notable loss threshold.
Change in prior accident years
◦
Loss reserve development for the three months ended December 31, 2017 and 2016 was as follows:
 
 
Three Months Ended December 31, 2017
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
Adverse development on event losses
 
$
53

 
$
177

 
$
6

 
$
236

(Favorable) development on attritional losses
 
(4,931
)
 
(3,541
)
 
(11,449
)
 
(19,921
)
Change in prior accident years
 
$
(4,878
)
 
$
(3,364
)
 
$
(11,443
)
 
$
(19,685
)

61

 
 
Three Months Ended December 31, 2016
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
(Favorable) adverse development on event losses
 
$
(39
)
 
$
(555
)
 
$
16

 
$
(578
)
(Favorable) development on attritional losses
 
(8,122
)
 
(316
)
 
(1,770
)
 
(10,208
)
Change in prior accident years
 
$
(8,161
)
 
$
(871
)
 
$
(1,754
)
 
$
(10,786
)
The net favorable development for the three months ended December 31, 2017 and 2016 was primarily driven by favorable development on attritional losses.
•
Loss ratio for the three months ended December 31, 2017 and 2016 was 73.5% and 68.5%, respectively, an increase of 5.0 percentage points.
•
Policy acquisition cost ratio for the three months ended December 31, 2017 was 18.1% compared to 24.3% for the three months ended December 31, 2016, a decrease of 6.2 percentage points. The decrease was primarily driven by new agriculture business written during the three months ended December 31, 2017 which carries lower acquisition costs.
•
General and administrative expenses for the three months ended December 31, 2017 were $64.9 million compared to $33.1 million for the three months ended December 31, 2016, an increase of $31.9 million or 96.4%. General and administrative expenses for the three months ended December 31, 2017 included $11.8 million of CRS expenses, of which $1.8 million related to the amortization of intangible assets acquired. The remaining increase in general and administrative expenses was primarily driven by a higher allocation of costs to the segment during the three months ended December 31, 2017 and a reduction in the performance bonus accrual during the three months ended December 31, 2016.
•
Combined ratio for the three months ended December 31, 2017 and 2016 was 112.2% and 108.1%, respectively, an increase of 4.1 percentage points.
•
Underwriting (loss) for the three months ended December 31, 2017 was $(36.8) million compared to $(19.1) million for the three months ended December 31, 2016, an increase of $17.6 million or 92.1%.




62

Fourth Quarter 2017 Results of Operations - Asset Management Segment
The following table presents the Asset Management segment (loss) income on an asset manager basis for the three months ended December 31, 2017 and 2016:
 
 
Three Months Ended December 31,
(Dollars in thousands)
 
2017
 
2016
Fee revenues
 
 
 
 
Third party
 
$
5,061

 
$
3,928

Related party
 
418

 
737

Total fee revenues
 
5,479

 
4,665

Expenses
 
 
 
 
General and administrative expenses
 
2,582

 
2,676

Share compensation expenses
 
41

 
82

Finance expenses
 
30

 
33

Tax (benefit) expense
 
(61
)
 
90

Foreign exchange losses
 
—

 
2

Total expenses
 
2,592

 
2,883

Income before investment (loss) income from funds and sidecars
 
2,887

 
1,782

Investment (loss) income from funds and sidecars (a)
 
 
 
 
AlphaCat Sidecars
 
11

 
14

AlphaCat ILS Funds - Lower Risk (b)
 
961

 
1,998

AlphaCat ILS Funds - Higher Risk (b)
 
(5,813
)
 
1,864

BetaCat ILS Funds
 
827

 
644

Validus' share of investment (loss) income from funds and sidecars
 
(4,014
)
 
4,520

Asset Management segment (loss) income
 
$
(1,127
)
 
$
6,302

 
 
 
 
 
Gross premiums written
 
 
 
 
AlphaCat Sidecars
 
$
(247
)
 
$
(163
)
AlphaCat ILS Funds - Lower Risk (b)
 
10,776

 
(19
)
AlphaCat ILS Funds - Higher Risk (b)
 
4,493

 
(105
)
AlphaCat Direct (c)
 
(24
)
 
23

Total
 
$
14,998

 
$
(264
)
(a)
The investment income (loss) from funds and sidecars is based on equity accounting.
(b)
Lower risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of less than 7%, whereas higher risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of 7% or greater. The maximum permitted portfolio expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit.
(c)
AlphaCat Direct includes direct investments from a third party investor in AlphaCat Re.
Highlights for the fourth quarter 2017 were as follows:
•
Fee revenues earned for the three months ended December 31, 2017 were $5.5 million compared to $4.7 million during the three months ended December 31, 2016, an increase of $0.8 million or 17.4%. Third party fee revenues earned during the three months ended December 31, 2017 were $5.1 million compared to $3.9 million during the three months ended December 31, 2016, an increase of $1.1 million or 28.8%. The increase in third party fee revenues was primarily driven by an increase in management fees as a result of an increase in assets under management over the last twelve months.
•
Total expenses for the three months ended December 31, 2017 were $2.6 million compared to $2.9 million during the three months ended December 31, 2016, a decrease of $0.3 million, or 10.1%.
•
Validus’ share of investment (loss) from funds and sidecars for the three months ended December 31, 2017 was $(4.0) million compared to income of $4.5 million during the three months ended December 31, 2016, a decrease of $8.5 million. The decrease was driven by the fourth quarter 2017 notable loss events.
•
Asset Management segment (loss) for the three months ended December 31, 2017 was $(1.1) million compared to income of $6.3 million during the three months ended December 31, 2016, a decrease of $7.4 million.


63

Assets Under Management
 
 
Assets Under Management (a)
(Dollars in thousands)
 
January 1, 2018
 
October 1, 2017
Assets Under Management - Related Party (a)
 
 
 
 
AlphaCat Sidecars
 
$
5,631

 
$
5,608

AlphaCat ILS Funds - Lower Risk (b)
 
75,898

 
75,492

AlphaCat ILS Funds - Higher Risk (b)
 
68,290

 
62,566

AlphaCat Direct (c)
 
—

 
—

BetaCat ILS Funds
 
24,914

 
24,084

Total
 
$
174,733

 
$
167,750

 
 
 
 
 
Assets Under Management - Third Party (a)
 
 
 
 
AlphaCat Sidecars
 
$
20,565

 
$
20,459

AlphaCat ILS Funds - Lower Risk (b)
 
1,663,606

 
1,317,417

AlphaCat ILS Funds - Higher Risk (b)
 
1,029,224

 
687,674

AlphaCat Direct (c)
 
443,730

 
546,226

BetaCat ILS Funds
 
67,046

 
120,391

Total
 
3,224,171

 
2,692,167

Total Assets Under Management (a)
 
$
3,398,904

 
$
2,859,917

(a)
The Company’s assets under management are based on NAV and are represented by investments made by related parties and third parties in the feeder funds and on a direct basis.
(b)
Lower risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of less than 7%, whereas higher risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of 7% or greater. The maximum permitted portfolio expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit.
(c)
AlphaCat Direct includes direct investments from third party investors in AlphaCat Re.
Assets under management were $3.4 billion as at January 1, 2018, compared to $2.9 billion as at October 1, 2017, of which third party assets under management were $3.2 billion as at January 1, 2018, compared to $2.7 billion as at October 1, 2017.
During the three months ended January 1, 2018, a total of $1,045.3 million of capital was raised, of which $1,029.1 million was raised from third parties. During the three months ended January 1, 2018, $402.4 million was returned to investors, of which $401.4 million was returned to third party investors.

64

Fourth Quarter 2017 Results - Corporate and Investments
The following table presents the Corporate and Investment function’s income and expense items on a consolidated basis for the three months ended December 31, 2017 and 2016:
 
 
Three Months Ended December 31,
(Dollars in thousands)
 
2017
 
2016
Managed investments
 
 
 
 
Managed net investment income (a)
 
$
41,609

 
$
35,875

Net realized gains on managed investments (a)
 
7,157

 
9,166

Change in net unrealized (losses) on managed investments (a)
 
(24,861
)
 
(67,676
)
Income from investment affiliates
 
6,345

 
2,166

Total managed investment return
 
30,250

 
(20,469
)
 
 
 
 
 
Corporate expenses
 
 
 
 
General and administrative expenses
 
5,582

 
19,973

Share compensation expenses
 
4,147

 
3,856

Finance expenses (a)
 
15,732

 
14,546

Dividends on preferred shares
 
5,828

 
2,203

Tax (benefit) (a)
 
(351
)
 
(21,237
)
Total Corporate expenses
 
30,938

 
19,341

 
 
 
 
 
Other items
 
 
 
 
Foreign exchange (losses) (a)
 
(829
)
 
(850
)
Other income
 
—

 
7

Total other items
 
(829
)
 
(843
)
Total Corporate and Investments
 
$
(1,517
)
 
$
(40,653
)
(a)
These items exclude the components which are included in the Asset Management segment income (loss) and amounts which are consolidated from VIEs.
Managed investments
Highlights for the fourth quarter 2017 were as follows:
•
Managed net investment income for the three months ended December 31, 2017 was $41.6 million compared to $35.9 million for the three months ended December 31, 2016, an increase of $5.7 million, or 16.0%. The increase was primarily driven by increased returns on the Company’s portfolio of managed fixed maturities and other investments.
•
Annualized effective yield on managed investments for the three months ended December 31, 2017 was 2.44%, compared to 2.25% for the three months ended December 31, 2016, an increase of 19 basis points.
•
Net realized gains on managed investments for the three months ended December 31, 2017 were $7.2 million compared to $9.2 million for the three months ended December 31, 2016.
•
Change in net unrealized (losses) on managed investments for the three months ended December 31, 2017 was $(24.9) million compared to $(67.7) million for the three months ended December 31, 2016. Changes in unrealized (losses) on managed investments during the three months ended December 31, 2017 were primarily driven by the impact of interest rate increases on the Company’s managed fixed maturity portfolio.
•
Income from investment affiliates for the three months ended December 31, 2017 was $6.3 million compared to $2.2 million for the three months ended December 31, 2016, an increase of $4.2 million, or 192.9%. The income from investment affiliates represents equity earnings on investments in funds managed by Aquiline Capital Partners LLC.


65

Corporate expenses and other items
Highlights for the fourth quarter 2017 were as follows:
•
General and administrative expenses for the three months ended December 31, 2017 were $5.6 million compared to $20.0 million for the three months ended December 31, 2016, a decrease of $14.4 million, or 72.1%. The decrease was primarily driven by a lower bonus accrual and a higher allocation of costs to reportable segments during the three months ended December 31, 2017.
•
Share compensation expenses for the three months ended December 31, 2017 were $4.1 million compared to $3.9 million for the three months ended December 31, 2016, an increase of $0.3 million, or 7.5%.
•
Finance expenses for the three months ended December 31, 2017 were $15.7 million compared to $14.5 million for the three months ended December 31, 2016, an increase of $1.2 million, or 8.2%. The increase was primarily driven by interest expenses relating to short-term borrowings which were repaid in full during the three months ended December 31, 2017.
•
Dividends paid on preferred shares for the three months ended December 31, 2017 were $5.8 million compared to $2.2 million for the three months ended December 31, 2016, an increase of $3.6 million, or 164.5% due to $250.0 million of new Series B preferred shares issued during the second quarter of 2017.
•
Tax (benefit) for the three months ended December 31, 2017 was $(0.4) million compared to $(21.2) million for the three months ended December 31, 2016. The tax benefit during the three months ended December 31, 2017 mainly related to operating losses in the Insurance segment and was partially offset by the re-measurement of net deferred taxes following the recently enacted 2017 Tax Act. The tax benefit during the three months ended December 31, 2016 related to a partial release of a valuation allowance which had been applied against a deferred tax asset related to net operating losses acquired as part of the Company’s acquisition of Flagstone. The release was due to the Company believing it is more-likely-than-not that it will have sufficient future taxable income to realize a portion of that deferred tax asset over three years beginning in 2017 and in accordance with U.S. GAAP, the Company was required to record a tax benefit of $18.4 million during the fourth quarter of 2016.
•
Foreign exchange (losses) for the three months ended December 31, 2017 were $(0.8) million compared to $(0.9) million for the three months ended December 31, 2016.





66

Full Year 2017, 2016 and 2015 Results of Operations - Consolidated
The following table presents the results of operations for the years ended December 31, 2017, 2016 and 2015:
 
 
Years Ended December 31,
(Dollars in thousands)
 
2017
 
2016
 
2015
Revenues
 
 
 
 
 
 
Gross premiums written
 
$
2,950,938

 
$
2,648,705

 
$
2,557,506

Reinsurance premiums ceded
 
(469,633
)
 
(289,705
)
 
(328,681
)
Net premiums written
 
2,481,305

 
2,359,000

 
2,228,825

Change in unearned premiums
 
99,783

 
(109,835
)
 
18,064

Net premiums earned
 
2,581,088

 
2,249,165

 
2,246,889

Net investment income
 
177,873

 
150,385

 
127,824

Net realized gains on investments
 
7,623

 
15,757

 
2,298

Change in net unrealized gains (losses) on investments
 
3,215

 
16,871

 
(32,395
)
Income (loss) from investment affiliates
 
22,010

 
(2,083
)
 
4,281

Other insurance related income and other income
 
13,179

 
2,195

 
5,111

Foreign exchange (losses) gains
 
(7,447
)
 
10,864

 
(8,731
)
Total revenues
 
2,797,541

 
2,443,154

 
2,345,277

Expenses
 
 
 
 
 
 
Losses and loss expenses
 
2,300,178

 
1,065,097

 
977,833

Policy acquisition costs
 
471,553

 
449,482

 
410,058

General and administrative expenses
 
352,137

 
336,294

 
363,709

Share compensation expenses
 
40,111

 
42,907

 
38,341

Finance expenses
 
58,546

 
58,520

 
74,742

Transaction expenses
 
4,427

 
—

 
—

Total expenses
 
3,226,952

 
1,952,300

 
1,864,683

(Loss) income before taxes, (loss) from operating affiliate and loss (income) attributable to AlphaCat investors
 
(429,411
)
 
490,854

 
480,594

Tax benefit (expense)
 
7,580

 
19,729

 
(6,376
)
(Loss) from operating affiliate
 
—

 
(23
)
 
(3,949
)
Loss (income) attributable to AlphaCat investors
 
16,929

 
(23,358
)
 
(2,412
)
Net (loss) income
 
(404,902
)
 
487,202

 
467,857

Net loss (income) attributable to noncontrolling interests
 
357,280

 
(123,363
)
 
(92,964
)
Net (loss) income (attributable) available to Validus
 
(47,622
)
 
363,839

 
374,893

Dividends on preferred shares
 
(15,861
)
 
(4,455
)
 
—

Net (loss) income (attributable) available to Validus common shareholders
 
$
(63,483
)
 
$
359,384

 
$
374,893

 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
Losses and loss expenses:
 
 
 
 
 
 
Current period excluding items below
 
$
1,425,166

 
$
1,120,841

 
$
1,164,775

Current period—notable loss events
 
1,046,949

 
90,211

 
96,964

Current period—non-notable loss events
 
50,596

 
70,237

 
22,231

Change in prior accident years
 
(222,533
)
 
(216,192
)
 
(306,137
)
Total losses and loss expenses
 
$
2,300,178

 
$
1,065,097

 
$
977,833

Selected ratios:
 
 
 
 
 
 
Ratio of net to gross premiums written
 
84.1
 %
 
89.1
 %
 
87.1
 %
Losses and loss expense ratio:
 
 
 
 
 
 
Current period excluding items below
 
55.1
 %
 
49.9
 %
 
51.8
 %
Current period—notable loss events
 
40.6
 %
 
4.0
 %
 
4.3
 %
Current period—non-notable loss events
 
2.0
 %
 
3.1
 %
 
1.0
 %
Change in prior accident years
 
(8.6
)%
 
(9.6
)%
 
(13.6
)%
Losses and loss expense ratio
 
89.1
 %
 
47.4
 %
 
43.5
 %
Policy acquisition cost ratio
 
18.3
 %
 
20.0
 %
 
18.3
 %
General and administrative expense ratio
 
15.2
 %
 
16.8
 %
 
17.9
 %
Expense ratio
 
33.5
 %
 
36.8
 %
 
36.2
 %
Combined ratio
 
122.6
 %
 
84.2
 %
 
79.7
 %


67

Highlights for the years ended December 31, 2017, 2016 and 2015 were as follows:
•
Gross premiums written for the years ended December 31, 2017, 2016 and 2015 were $2,950.9 million, $2,648.7 million and $2,557.5 million, respectively. The increase in gross premiums written during the year ended December 31, 2017 as compared to 2016 of $302.2 million, or 11.4% was primarily driven by an increase in the Insurance and Asset Management segments. The increase in gross premiums written of $91.2 million, or 3.6% during the year ended December 31, 2016 as compared to 2015 was primarily driven by an increase in the Asset Management segment.
•
Reinsurance premiums ceded for the years ended December 31, 2017, 2016 and 2015 were $469.6 million, $289.7 million, and $328.7 million, respectively. The increase in reinsurance premiums ceded during the year ended December 31, 2017 as compared to 2016 of $179.9 million, or 62.1% was primarily driven by increases in the Reinsurance and Insurance segments. The decrease in reinsurance premiums ceded of $39.0 million, or 11.9% during the year ended December 31, 2016 as compared to 2015 was primarily driven by a decrease in the Reinsurance segment.
•
Net premiums earned for the years ended December 31, 2017, 2016 and 2015 were $2,581.1 million, $2,249.2 million, and $2,246.9 million, respectively.
•
Losses and loss expenses for the years ended December 31, 2017, 2016 and 2015 were $2,300.2 million, $1,065.1 million and $977.8 million, respectively and included the following:
Notable Loss Events
•
Losses and loss expenses incurred during the year ended December 31, 2017 from notable loss events were $1,046.9 million, or 40.6 percentage points of the loss ratio. Net of losses attributable to AlphaCat investors and noncontrolling interests of $603.4 million and the net impact of reinstatement premiums and acceleration of unearned premiums of $31.3 million, the net loss attributable to Validus from 2017 notable loss events was $412.2 million and was incurred by event as follows:
 
 
Year Ended December 31, 2017
 
 
Notable Loss Events
(Dollars in thousands)
 
Hurricane Harvey
 
Hurricane Irma
 
Hurricane Maria
 
Northern California Wildfires
 
Southern California Wildfires
 
Total
Net losses and loss expenses
 
$
313,204

 
$
458,145

 
$
149,351

 
$
87,754

 
$
38,495

 
$
1,046,949

Net losses and loss expenses attributable to AlphaCat third party investors and noncontrolling interests
 
(163,103
)
 
(265,362
)
 
(93,531
)
 
(67,592
)
 
(13,837
)
 
(603,425
)
Validus’ share of net losses and loss expenses
 
150,101

 
192,783

 
55,820

 
20,162

 
24,658

 
443,524

Net impact on premiums earned (a)
 
4,653

 
(26,433
)
 
(1,482
)
 
(8,024
)
 
—

 
(31,286
)
Net loss attributable to Validus
 
$
154,754

 
$
166,350

 
$
54,338

 
$
12,138

 
$
24,658

 
$
412,238

(a)
Net impact on premiums earned includes reinstatement premiums assumed and ceded and the net impact of accelerating unearned premiums assumed and ceded.
•
Losses and loss expenses incurred during the year ended December 31, 2016 from notable loss events were $90.2 million, or 4.0 percentage points of the loss ratio. Net of losses attributable to AlphaCat investors and noncontrolling interests of $21.7 million and reinstatement premiums of $4.3 million, the net loss attributable to Validus from 2016 notable loss events was $64.2 million and was incurred by event as follows:
 
 
Year Ended December 31, 2016
 
 
Notable Loss Events
(Dollars in thousands)
 
Canadian
Wildfires
 
Hurricane
Matthew
 
2016 New Zealand Earthquake
 
Total
Net losses and loss expenses
 
$
19,650

 
$
39,140

 
$
31,421

 
$
90,211

Net losses and loss expenses attributable to AlphaCat third party investors and noncontrolling interests
 
(3,696
)
 
(8,943
)
 
(9,068
)
 
(21,707
)
Validus’ share of net losses and loss expenses
 
15,954

 
30,197

 
22,353

 
68,504

Reinstatement premiums, net
 
(1,496
)
 
(2,781
)
 
(65
)
 
(4,342
)
Net loss attributable to Validus
 
$
14,458

 
$
27,416

 
$
22,288

 
$
64,162



68

•
Losses and loss expenses incurred during the year ended December 31, 2015 from notable loss events were $97.0 million, or 4.3 percentage points of the loss ratio. Net of reinstatement premiums of $1.8 million, the net loss attributable to Validus from 2015 non-notable loss events was $95.2 million and was incurred by event as follows:
 
 
Year Ended December 31, 2015
 
 
Notable Loss Events
(Dollars in thousands)
 
Tianjin Port Explosion
 
Pemex Oil
Refinery Explosion
 
Total
Validus’ share of net losses and loss expenses
 
$
47,427

 
$
49,537

 
$
96,964

Reinstatement premiums, net
 
(3,896
)
 
2,130

 
(1,766
)
Net loss attributable to Validus
 
$
43,531

 
$
51,667

 
$
95,198

Non-notable Loss Events
•
Losses and loss expenses incurred during the year ended December 31, 2017 from non-notable loss events were $50.6 million, or 2.0 percentage points of the loss ratio. Net of losses attributable to AlphaCat investors and noncontrolling interests of $4.1 million and including the impact of net reinstatement premiums ceded of $0.3 million, the net loss attributable to Validus from 2017 non-notable loss events was $46.8 million and was incurred by event as follows:
 
 
Year Ended December 31, 2017
 
 
Non-notable Loss Events
(Dollars in thousands)
 
Energy
Loss Event
 
Mexico City Earthquake
 
Total
Net losses and loss expenses
 
$
27,330

 
$
23,266

 
$
50,596

Net losses and loss expenses attributable to AlphaCat third party investors and noncontrolling interests
 
—

 
(4,104
)
 
(4,104
)
Validus’ share of net losses and loss expenses
 
27,330

 
19,162

 
46,492

Reinstatement premiums, net
 
513

 
(213
)
 
300

Net loss attributable to Validus
 
$
27,843

 
$
18,949

 
$
46,792

•
Losses and loss expenses incurred during the year ended December 31, 2016 from non-notable loss events were $70.2 million, or 3.1 percentage points of the loss ratio. Net of losses attributable to AlphaCat investors and noncontrolling interests of $5.6 million and reinstatement premiums of $12.6 million, the net loss attributable to Validus from 2016 non-notable loss events was $52.0 million and was incurred by event as follows:
 
 
Year Ended December 31, 2016
 
 
Non-notable Loss Events
(Dollars in thousands)
 
Texas Hailstorms
 
Kumamoto Earthquake
 
Jubilee Oil
 
SpaceX
 
Total
Net losses and loss expenses
 
$
19,305

 
$
15,480

 
$
15,213

 
$
20,239

 
70,237

Net losses and loss expenses attributable to AlphaCat third party investors and noncontrolling interests
 
(5,638
)
 
—

 
—

 
—

 
(5,638
)
Validus’ share of net losses and loss expenses
 
13,667

 
15,480

 
15,213

 
20,239

 
64,599

Reinstatement premiums, net
 
(2,108
)
 
—

 
(8,942
)
 
(1,510
)
 
(12,560
)
Net loss attributable to Validus
 
$
11,559

 
$
15,480

 
$
6,271

 
$
18,729

 
$
52,039

•
Losses and loss expenses incurred during the year ended December 31, 2015 from a single non-notable loss event, the 2015 Chilean Earthquake, were $22.2 million, or 1.0 percentage point of the loss ratio. Net of reinstatement premiums of $2.2 million, the net loss attributable to Validus from 2015 non-notable loss events was $20.0 million.
Attritional losses
•Attritional losses of $1,425.2 million, $1,120.8 million and $1,164.8 million or 55.1, 49.9 and 51.8 percentage points of the loss ratio during the years ended December 31, 2017, 2016 and 2015, respectively.




69

Change in prior accident years
◦
Loss reserve development for the years ended December 31, 2017, 2016 and 2015 was as follows:
 
 
Years Ended December 31,
(Dollars in thousands)
 
2017
 
2016
 
2015
(Favorable) development on event losses
 
$
(30,765
)
 
$
(14,394
)
 
$
(52,196
)
(Favorable) development on attritional losses
 
(191,768
)
 
(201,798
)
 
(253,941
)
Change in prior accident years
 
$
(222,533
)
 
$
(216,192
)
 
$
(306,137
)
The favorable development on events in 2017 primarily related to favorable development on the 2015 Pemex oil refinery explosion. The favorable development on events in 2016 primarily related to favorable development on the 2015 Chilean Earthquake non-notable loss event and the 2015 Tianjin port explosion notable loss event and was partially offset by adverse development established following the receipt of a loss advice on an individual marine policy that incepted during the second half of 2015. The favorable development on events in 2015 primarily related to favorable development on Superstorm Sandy.
•
Loss ratio for the years ended December 31, 2017, 2016 and 2015 was 89.1%, 47.4% and 43.5%, respectively.
◦
Loss ratios by line of business for the years ended December 31, 2017, 2016 and 2015 were as follows:
 
Years Ended December 31,
 
2017
 
2016
 
2015
Property
134.4
%
 
35.3
%
 
23.0
%
Specialty - Short-tail
61.0
%
 
53.6
%
 
54.8
%
Specialty - Other
60.5
%
 
60.7
%
 
59.6
%
All lines
89.1
%
 
47.4
%
 
43.5
%
•
Policy acquisition cost ratio for the years ended December 31, 2017, 2016 and 2015 was 18.3%, 20.0% and 18.3%, respectively.
•
General and administrative expenses for the years ended December 31, 2017, 2016 and 2015 were $352.1 million, $336.3 million and $363.7 million, respectively.
•
Combined ratio for the years ended December 31, 2017, 2016 and 2015 was 122.6%, 84.2% and 79.7%, respectively.

70

Full Year 2017 Results of Operations - Reinsurance Segment
The following table presents underwriting results by line of business for the years ended December 31, 2017 and 2016:
 
 
Years Ended December 31,
 
 
2017
 
2016
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
 Total
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
548,977

 
$
505,111

 
$
141,119

 
$
1,195,207

 
$
497,263

 
$
555,504

 
$
132,145

 
$
1,184,912

Reinsurance premiums ceded
 
(147,547
)
 
(45,071
)
 
(16,671
)
 
(209,289
)
 
(88,342
)
 
(32,623
)
 
(366
)
 
(121,331
)
Net premiums written
 
401,430

 
460,040

 
124,448

 
985,918

 
408,921

 
522,881

 
131,779

 
1,063,581

Change in unearned premiums
 
45,946

 
(7,020
)
 
(1,840
)
 
37,086

 
10,214

 
(265
)
 
(77,381
)
 
(67,432
)
Net premiums earned
 
447,376

 
453,020

 
122,608

 
1,023,004

 
419,135

 
522,616

 
54,398

 
996,149

Other insurance related income
 
 
 
 
 
 
 
67

 
 
 
 
 
 
 
25

Total underwriting revenues
 
 
 
 
 
 
 
1,023,071

 
 
 
 
 
 
 
996,174

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
364,112

 
256,941

 
71,666

 
692,719

 
102,334

 
281,216

 
31,955

 
415,505

Policy acquisition costs
 
73,777

 
86,714

 
38,939

 
199,430

 
75,417

 
94,685

 
19,695

 
189,797

Total underwriting deductions before G&A
 
437,889

 
343,655

 
110,605

 
892,149

 
177,751

 
375,901

 
51,650

 
605,302

Underwriting income before G&A
 
$
9,487

 
$
109,365

 
$
12,003

 
$
130,922

 
$
241,384

 
$
146,715

 
$
2,748

 
$
390,872

General and administrative expenses
 
 
 
 
 
 
 
80,177

 
 
 
 
 
 
 
85,000

Share compensation expenses
 
 
 
 
 
 
 
10,762

 
 
 
 
 
 
 
11,668

Total underwriting deductions
 
 
 
 
 
 
 
983,088

 
 
 
 
 
 
 
701,970

Underwriting income
 
 
 
 
 
 
 
$
39,983

 
 
 
 
 
 
 
$
294,204

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
$
125,560

 
$
287,369

 
$
74,285

 
$
487,214

 
$
97,783

 
$
325,426

 
$
36,040

 
$
459,249

Current period—notable loss events
 
258,798

 
38,967

 
—

 
297,765

 
43,244

 
1,920

 
—

 
45,164

Current period—non-notable loss events
 
13,817

 
7,225

 
—

 
21,042

 
22,409

 
24,309

 
—

 
46,718

Change in prior accident years
 
(34,063
)
 
(76,620
)
 
(2,619
)
 
(113,302
)
 
(61,102
)
 
(70,439
)
 
(4,085
)
 
(135,626
)
Total losses and loss expenses
 
$
364,112

 
$
256,941

 
$
71,666

 
$
692,719

 
$
102,334

 
$
281,216

 
$
31,955

 
$
415,505

Selected ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
73.1
 %
 
91.1
 %
 
88.2
 %
 
82.5
 %
 
82.2
 %
 
94.1
 %
 
99.7
 %
 
89.8
 %
Losses and loss expense ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
28.1
 %
 
63.4
 %
 
60.6
 %
 
47.6
 %
 
23.4
 %
 
62.2
 %
 
66.2
 %
 
46.1
 %
Current period—notable loss events
 
57.8
 %
 
8.6
 %
 
—
 %
 
29.1
 %
 
10.3
 %
 
0.4
 %
 
—
 %
 
4.5
 %
Current period—non-notable loss events
 
3.1
 %
 
1.6
 %
 
—
 %
 
2.1
 %
 
5.3
 %
 
4.7
 %
 
—
 %
 
4.7
 %
Change in prior accident years
 
(7.6
)%
 
(16.9
)%
 
(2.1
)%
 
(11.1
)%
 
(14.6
)%
 
(13.5
)%
 
(7.5
)%
 
(13.6
)%
Losses and loss expense ratio
 
81.4
 %
 
56.7
 %
 
58.5
 %
 
67.7
 %
 
24.4
 %
 
53.8
 %
 
58.7
 %
 
41.7
 %
Policy acquisition cost ratio
 
16.5
 %
 
19.1
 %
 
31.8
 %
 
19.5
 %
 
18.0
 %
 
18.1
 %
 
36.2
 %
 
19.1
 %
General and administrative expense ratio
 
 
 
 
 
 
 
8.9
 %
 
 
 
 
 
 
 
9.7
 %
Expense ratio
 
 
 
 
 
 
 
28.4
 %
 
 
 
 
 
 
 
28.8
 %
Combined ratio
 
 
 
 
 
 
 
96.1
 %
 
 
 
 
 
 
 
70.5
 %

71

Highlights for the year ended December 31, 2017 as compared to the year ended December 31, 2016 were as follows:
•
Gross premiums written for the year ended December 31, 2017 were $1,195.2 million compared to $1,184.9 million for the year ended December 31, 2016, an increase of $10.3 million, or 0.9% and included the following:
•
Property premiums of $549.0 million during the year ended December 31, 2017, compared to $497.3 million during the year ended December 31, 2016, an increase of $51.7 million or 10.4%. The increase was primarily driven by $65.3 million of reinstatement premiums on 2017 notable and non-notable loss events and was partially offset by reductions in participation and the non-renewal of various catastrophe excess of loss and proportional programs due to unfavorable market conditions;
•
Specialty - short-tail premiums of $505.1 million during the year ended December 31, 2017, compared to $555.5 million during the year ended December 31, 2016, a decrease of $50.4 million or 9.1% primarily driven by a reduction in proportional agriculture business following the CRS acquisition; and
•
Specialty - other premiums of $141.1 million during the year ended December 31, 2017, compared to $132.1 million during the year ended December 31, 2016, an increase of $9.0 million or 6.8% primarily due to new business written and was partially offset by the timing of renewals in the casualty class of business.
•
Reinsurance premiums ceded for the year ended December 31, 2017 were $209.3 million compared to $121.3 million for the year ended December 31, 2016, an increase of $88.0 million or 72.5%. The increase was primarily driven by an increase in the property lines of $59.2 million as a result of new retrocession cover purchased from Tailwind Re, a new proportional retro program and new retrocession coverage purchased following 2017 notable loss events. Also contributing to the increase were increases in the specialty - short-tail and specialty - other lines of $12.4 million and $16.3 million, respectively, as a result of new non-proportional retro coverage and a new quota share retrocession program, respectively.
•
Net premiums earned for the year ended December 31, 2017 were $1,023.0 million compared to $996.1 million for the year ended December 31, 2016, an increase of $26.9 million or 2.7%. Excluding the net impact of reinstatement premiums assumed and the acceleration of unearned premiums ceded from 2017 notable loss events of $53.4 million, net premiums earned were $969.6 million, a decrease of $26.6 million, or 2.7% compared to the year ended December 31, 2016.
•
Losses and loss expenses for the year ended December 31, 2017 were $692.7 million compared to $415.5 million for the year ended December 31, 2016, an increase of $277.2 million or 66.7% and included the following:
Notable Loss Events
•
Losses and loss expenses incurred during the year ended December 31, 2017 from notable loss events were $297.8 million, or 29.1 percentage points of the loss ratio. Net of reinstatement premiums and the acceleration of unearned premiums of $53.4 million, the net loss attributable to the Reinsurance segment from 2017 notable loss events was $244.3 million and was incurred by event as follows:
 
 
Year Ended December 31, 2017
 
 
Notable Loss Events
(Dollars in thousands)
 
Hurricane Harvey
 
Hurricane Irma
 
Hurricane Maria
 
Northern California Wildfires
 
Southern California Wildfires
 
Total
Net losses and loss expenses
 
$
104,611

 
$
138,082

 
$
31,202

 
$
4,762

 
$
19,108

 
$
297,765

Net impact on premiums earned (a)
 
(11,028
)
 
(30,927
)
 
(3,460
)
 
(8,024
)
 
—

 
(53,439
)
Net loss attributable to Reinsurance segment
 
$
93,583

 
$
107,155

 
$
27,742

 
$
(3,262
)
 
$
19,108

 
$
244,326

(a)Net impact on premiums earned includes reinstatement premiums assumed and the net impact of accelerating unearned premiums assumed and ceded.
Net losses and loss expenses from the 2017 notable loss events by line of business were as follows:
 
 
Year Ended December 31, 2017
 
 
Notable Loss Events
(Dollars in thousands)
 
Hurricane Harvey
 
Hurricane Irma
 
Hurricane Maria
 
Northern California Wildfires
 
Southern California Wildfires
 
Total
Property
 
$
85,476

 
$
122,285

 
$
27,167

 
$
4,762

 
$
19,108

 
$
258,798

Specialty - Short-tail
 
19,135

 
15,797

 
4,035

 
—

 
—

 
38,967

Specialty - Other
 
—

 
—

 
—

 
—

 
—

 
—

Net losses and loss expenses
 
$
104,611

 
$
138,082

 
$
31,202

 
$
4,762

 
$
19,108

 
$
297,765


72

•
Losses and loss expenses incurred during the year ended December 31, 2016 from notable loss events were $45.2 million, or 4.5 percentage points of the loss ratio. Net of reinstatement premiums of $3.9 million, the net loss attributable to the Reinsurance segment from 2016 notable loss events was $41.2 million and was incurred by event as follows:
 
 
Year Ended December 31, 2016
 
 
Notable Loss Events
(Dollars in thousands)
 
Canadian
Wildfires
 
Hurricane
Matthew
 
2016 New Zealand Earthquake
 
Total
Net losses and loss expenses
 
$
12,184

 
$
14,078

 
$
18,902

 
$
45,164

Reinstatement premiums, net
 
(1,085
)
 
(2,794
)
 
(64
)
 
(3,943
)
Net loss attributable to Reinsurance segment
 
$
11,099

 
$
11,284

 
$
18,838

 
$
41,221

Net losses and loss expenses from the 2016 notable loss events by line of business were as follows:
 
 
Year Ended December 31, 2016
 
 
Notable Loss Events
(Dollars in thousands)
 
Canadian
Wildfires
 
Hurricane
Matthew
 
2016 New Zealand Earthquake
 
Total
Property
 
$
12,184

 
$
12,158

 
$
18,902

 
$
43,244

Specialty - Short-tail
 
—

 
1,920

 
—

 
1,920

Specialty - Other
 
—

 
—

 
—

 
—

Net losses and loss expenses
 
$
12,184

 
$
14,078

 
$
18,902

 
$
45,164

Non-notable Loss Events
•
Losses and loss expenses incurred during the year ended December 31, 2017 from non-notable loss events were $21.0 million, or 2.1 percentage points of the loss ratio. Net of reinstatement premiums of $1.6 million, the net loss attributable to the Reinsurance segment from 2017 non-notable loss events was $19.4 million and was incurred by event as follows:
 
 
Year Ended December 31, 2017
 
 
Non-notable Loss Events
(Dollars in thousands)
 
Energy
Loss Event
 
Mexico City Earthquake
 
Total
Net losses and loss expenses
 
$
10,854

 
$
10,188

 
$
21,042

Reinstatement premiums, net
 
(1,408
)
 
(213
)
 
(1,621
)
Net loss attributable to Reinsurance segment
 
$
9,446

 
$
9,975

 
$
19,421

Net losses and loss expenses from the 2017 notable loss events by line of business were as follows:
 
 
Year Ended December 31, 2017
 
 
Non-notable Loss Events
(Dollars in thousands)
 
Energy
Loss Event
 
Mexico City Earthquake
 
Total
Property
 
$
3,629

 
$
10,188

 
$
13,817

Specialty - Short-tail
 
7,225

 
—

 
7,225

Specialty - Other
 
—

 
—

 
—

Net losses and loss expenses
 
$
10,854

 
$
10,188

 
$
21,042


73

•
Losses and loss expenses incurred during the year ended December 31, 2016 from non-notable loss events were $46.7 million, or 4.7 percentage points of the loss ratio. Net of reinstatement premiums of $11.5 million, the net loss attributable to the Reinsurance segment from 2016 non-notable loss events was $35.2 million and was incurred by event as follows:
 
 
Year Ended December 31, 2016
 
 
Non-notable Loss Events
(Dollars in thousands)
 
Texas Hailstorms
 
Kumamoto Earthquake
 
Jubilee Oil
 
SpaceX
 
Total
Net losses and loss expenses
 
$
7,215

 
$
15,195

 
$
14,695

 
$
9,613

 
$
46,718

Reinstatement premiums, net
 
(2,077
)
 
—

 
(7,981
)
 
(1,485
)
 
(11,543
)
Net loss attributable to Reinsurance segment
 
$
5,138

 
$
15,195

 
$
6,714

 
$
8,128

 
$
35,175

Net losses and loss expenses from the 2016 non-notable loss events by line of business were as follows:
 
 
Year Ended December 31, 2016
 
 
Non-notable Loss Events
(Dollars in thousands)
 
Texas Hailstorms
 
Kumamoto Earthquake
 
Jubilee Oil
 
SpaceX
 
Total
Property
 
$
7,214

 
$
15,195

 
$
—

 
$
—

 
$
22,409

Specialty - Short-tail
 
1

 
—

 
14,695

 
9,613

 
24,309

Specialty - Other
 
—

 
—

 
—

 
—

 
—

Net losses and loss expenses
 
$
7,215

 
$
15,195

 
$
14,695

 
$
9,613

 
$
46,718

Attritional losses
•Attritional losses for the year ended December 31, 2017 were $487.2 million, or 47.6 percentage points of the loss ratio compared to $459.2 million, or 46.1 percentage points of the loss ratio for the year ended December 31, 2016.
Change in prior accident years
◦
Loss reserve development for the years ended December 31, 2017 and 2016 was as follows:
 
 
Year Ended December 31, 2017
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
(Favorable) development on event losses
 
$
(14,885
)
 
$
(7,769
)
 
$
(285
)
 
$
(22,939
)
(Favorable) development on attritional losses
 
(19,178
)
 
(68,851
)
 
(2,334
)
 
(90,363
)
Change in prior accident years
 
$
(34,063
)
 
$
(76,620
)
 
$
(2,619
)
 
$
(113,302
)
The favorable development on events in the property lines for the year ended December 31, 2017 primarily related to favorable development on multiple loss events. The favorable development on events in the specialty - short-tail lines for the year ended December 31, 2017 primarily related to favorable development on the 2015 Pemex oil refinery explosion notable loss event.
 
 
Year Ended December 31, 2016
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
(Favorable) adverse development on event losses
 
$
(34,957
)
 
$
6,831

 
$
(17
)
 
$
(28,143
)
(Favorable) development on attritional losses
 
(26,145
)
 
(77,270
)
 
(4,068
)
 
(107,483
)
Change in prior accident years
 
$
(61,102
)
 
$
(70,439
)
 
$
(4,085
)
 
$
(135,626
)
The favorable development on events in the property lines for the year ended December 31, 2016 primarily related to the 2015 Chilean Earthquake non-notable loss event and the 2015 Tianjin port explosion notable loss event. The adverse development on events in the specialty - short-tail lines for the year ended December 31, 2016 primarily related to reserves established following the receipt of a loss advice on an individual marine policy that incepted during the second half of 2015.

74

•
Loss ratio for the years ended December 31, 2017 and 2016 was 67.7% and 41.7%, respectively, an increase of 26.0 percentage points.
•
Policy acquisition cost ratio for the years ended December 31, 2017 and 2016 was 19.5% and 19.1%, respectively, an increase of 0.4 percentage points.
•
General and administrative expenses for the years ended December 31, 2017 and 2016 were $80.2 million and $85.0 million, respectively, a decrease of $4.8 million or 5.7%. The decrease was primarily driven by a reduction in the bonus accrual during the year ended December 31, 2017 and was partially offset by a higher allocation of costs to the segment during the year ended December 31, 2017.
•
Underwriting income for the year ended December 31, 2017 was $40.0 million compared to $294.2 million for the year ended December 31, 2016, a decrease of $254.2 million or 86.4%.

75

The following table presents underwriting results by line of business for the years ended December 31, 2016 and 2015:
 
 
Years Ended December 31,
 
 
2016
 
2015
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
 Total
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
497,263

 
$
555,504

 
$
132,145

 
$
1,184,912

 
$
571,612

 
$
599,333

 
$
23,644

 
$
1,194,589

Reinsurance premiums ceded
 
(88,342
)
 
(32,623
)
 
(366
)
 
(121,331
)
 
(124,653
)
 
(33,780
)
 
—

 
(158,433
)
Net premiums written
 
408,921

 
522,881

 
131,779

 
1,063,581

 
446,959

 
565,553

 
23,644

 
1,036,156

Change in unearned premiums
 
10,214

 
(265
)
 
(77,381
)
 
(67,432
)
 
5,222

 
18,104

 
(11,499
)
 
11,827

Net premiums earned
 
419,135

 
522,616

 
54,398

 
996,149

 
452,181

 
583,657

 
12,145

 
1,047,983

Other insurance related income
 
 
 
 
 
 
 
25

 
 
 
 
 
 
 
2,214

Total underwriting revenues
 
 
 
 
 
 
 
996,174

 
 
 
 
 
 
 
1,050,197

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
102,334

 
281,216

 
31,955

 
415,505

 
90,148

 
382,203

 
(4,563
)
 
467,788

Policy acquisition costs
 
75,417

 
94,685

 
19,695

 
189,797

 
75,590

 
93,203

 
4,781

 
173,574

Total underwriting deductions before G&A
 
177,751

 
375,901

 
51,650

 
605,302

 
165,738

 
475,406

 
218

 
641,362

Underwriting income before G&A
 
$
241,384

 
$
146,715

 
$
2,748

 
$
390,872

 
$
286,443

 
$
108,251

 
$
11,927

 
$
408,835

General and administrative expenses
 
 
 
 
 
 
 
85,000

 
 
 
 
 
 
 
94,531

Share compensation expenses
 
 
 
 
 
 
 
11,668

 
 
 
 
 
 
 
11,137

Total underwriting deductions
 
 
 
 
 
 
 
701,970

 
 
 
 
 
 
 
747,030

Underwriting income
 
 
 
 
 
 
 
$
294,204

 
 
 
 
 
 
 
$
303,167

Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
$
97,783

 
$
325,426

 
$
36,040

 
$
459,249

 
$
117,289

 
$
402,406

 
$
(3,511
)
 
$
516,184

Current period—notable loss events
 
43,244

 
1,920

 
—

 
45,164

 
25,875

 
44,624

 
—

 
70,499

Current period—non-notable loss events
 
22,409

 
24,309

 
—

 
46,718

 
18,134

 
366

 
—

 
18,500

Change in prior accident years
 
(61,102
)
 
(70,439
)
 
(4,085
)
 
(135,626
)
 
(71,150
)
 
(65,193
)
 
(1,052
)
 
(137,395
)
Total losses and loss expenses
 
$
102,334

 
$
281,216

 
$
31,955

 
$
415,505

 
$
90,148

 
$
382,203

 
$
(4,563
)
 
$
467,788

Selected ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
82.2
 %
 
94.1
 %
 
99.7
 %
 
89.8
 %
 
78.2
 %
 
94.4
 %
 
100.0
 %
 
86.7
 %
Losses and loss expense ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
23.4
 %
 
62.2
 %
 
66.2
 %
 
46.1
 %
 
25.9
 %
 
69.0
 %
 
(28.9
)%
 
49.2
 %
Current period—notable loss events
 
10.3
 %
 
0.4
 %
 
—
 %
 
4.5
 %
 
5.7
 %
 
7.6
 %
 
—
 %
 
6.7
 %
Current period—non-notable loss events
 
5.3
 %
 
4.7
 %
 
—
 %
 
4.7
 %
 
4.0
 %
 
0.1
 %
 
—
 %
 
1.8
 %
Change in prior accident years
 
(14.6
)%
 
(13.5
)%
 
(7.5
)%
 
(13.6
)%
 
(15.7
)%
 
(11.2
)%
 
(8.7
)%
 
(13.1
)%
Losses and loss expense ratio
 
24.4
 %
 
53.8
 %
 
58.7
 %
 
41.7
 %
 
19.9
 %
 
65.5
 %
 
(37.6
)%
 
44.6
 %
Policy acquisition cost ratio
 
18.0
 %
 
18.1
 %
 
36.2
 %
 
19.1
 %
 
16.7
 %
 
16.0
 %
 
39.4
 %
 
16.6
 %
General and administrative expense ratio
 
 
 
 
 
 
 
9.7
 %
 
 
 
 
 
 
 
10.1
 %
Expense ratio
 
 
 
 
 
 
 
28.8
 %
 
 
 
 
 
 
 
26.7
 %
Combined ratio
 
 
 
 
 
 
 
70.5
 %
 
 
 
 
 
 
 
71.3
 %

76

Highlights for the year ended December 31, 2016 as compared to the year ended December 31, 2015 were as follows:
•
Gross premiums written for the year ended December 31, 2016 were $1,184.9 million compared to $1,194.6 million for the year ended December 31, 2015, a decrease of $9.7 million, or 0.8% and included the following:
•
Property premiums of $497.3 million during the year ended December 31, 2016, compared to $571.6 million during the year ended December 31, 2015, a decrease of $74.3 million or 13.0%, primarily driven by reductions in our participation on various catastrophe excess of loss programs due to an unfavorable rate environment;
•
Specialty - short-tail premiums of $555.5 million during the year ended December 31, 2016, compared to $599.3 million during the year ended December 31, 2015, a decrease of $43.8 million or 7.3%, primarily driven by reductions in our participation on various marine programs as a result of challenging market conditions; and
•
Specialty - other premiums of $132.1 million during the year ended December 31, 2016, compared to $23.6 million during the year ended December 31, 2015, an increase of $108.5 million, primarily driven by new casualty business written during the year ended December 31, 2016.
•
Reinsurance premiums ceded for the year ended December 31, 2016 were $121.3 million compared to $158.4 million for the year ended December 31, 2015, a decrease of $37.1 million or 23.4%. The decrease was primarily due to a reduction in the costs associated with the Company’s main proportional retrocession program during the year ended December 31, 2016.
•
Net premiums earned for the year ended December 31, 2016 were $996.1 million compared to $1,048.0 million for the year ended December 31, 2015, a decrease of $51.8 million or 4.9%. The decrease was driven by decreases in the property and specialty - short-tail lines of $33.0 million and $61.0 million, respectively, as a result of lower gross premiums written during the year ended December 31, 2016, offset by the earned impact of the reduction in reinsurance premiums ceded and was partially offset by an increase in net premiums earned in the specialty lines of $42.3 million, primarily due to the increase in gross premiums written as noted above, the impact of reinstatement premiums and adjustments to existing business.
•
Losses and loss expenses for the year ended December 31, 2016 were $415.5 million compared to $467.8 million for the year ended December 31, 2015, a decrease of $52.3 million or 11.2% and included the following:
Notable Loss Events
•
Losses and loss expenses incurred during the year ended December 31, 2015 from notable loss events were $70.5 million, or 6.7 percentage points of the loss ratio. Net of reinstatement premiums of $0.4 million, the net loss attributable to the Reinsurance segment from 2015 notable loss events was $70.1 million and was incurred by event as follows:
 
 
Year Ended December 31, 2015
 
 
Notable Loss Events
(Dollars in thousands)
 
Tianjin Port Explosion
 
Pemex Oil
Refinery Explosion
 
Total
Net losses and loss expenses
 
$
41,162

 
$
29,337

 
$
70,499

Reinstatement premiums, net
 
(3,098
)
 
2,704

 
(394
)
Net loss attributable to Reinsurance segment
 
$
38,064

 
$
32,041

 
$
70,105

Net losses and loss expenses from the 2015 notable loss events by line of business were as follows:
 
 
Year Ended December 31, 2015
 
 
Notable Loss Events
(Dollars in thousands)
 
Tianjin Port Explosion
 
Pemex Oil
Refinery Explosion
 
Total
Property
 
$
25,448

 
$
427

 
$
25,875

Specialty - Short-tail
 
15,714

 
28,910

 
44,624

Specialty - Other
 
—

 
—

 
—

Net losses and loss expenses
 
$
41,162

 
$
29,337

 
$
70,499

Non-notable Loss Events
•
Losses and loss expenses incurred during the year ended December 31, 2015 from a single non-notable loss event, the 2015 Chilean Earthquake, were $18.5 million, or 1.8 percentage points of the loss ratio and related primarily to the property lines. Net of reinstatement premiums of $2.2 million, the net loss attributable to the Reinsurance segment was $16.3 million.

77

Attritional losses
•
Attritional losses during the year ended December 31, 2016 were $459.2 million, or 46.1 percentage points of the loss ratio compared to $516.2 million, or 49.2 percentage points of the loss ratio during the year ended December 31, 2015.
Change in prior accident years
◦
Loss reserve development for the year ended December 31, 2015 was as follows:
 
 
Year Ended December 31, 2015
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
(Favorable) adverse development on event losses
 
$
(33,113
)
 
$
745

 
$
(266
)
 
$
(32,634
)
(Favorable) development on attritional losses
 
(38,037
)
 
(65,938
)
 
(786
)
 
(104,761
)
Change in prior accident years
 
$
(71,150
)
 
$
(65,193
)
 
$
(1,052
)
 
$
(137,395
)
The favorable development on events in the property lines for the year ended December 31, 2015 was primarily related to Superstorm Sandy.
•
Loss ratio for the years ended December 31, 2016 and 2015 was 41.7% and 44.6%, respectively, a decrease of 2.9 percentage points.
•
Policy acquisition cost ratio for the years ended December 31, 2016 and 2015 was 19.1% and 16.6%, respectively, an increase of 2.5 percentage points.
•
General and administrative expenses for the years ended December 31, 2016 and 2015 were $85.0 million and $94.5 million, respectively, a decrease of $9.5 million or 10.1%. The decrease was primarily due to a reduction in office related expenses, staff costs and the performance bonus accrual.
•
Underwriting income for the year ended December 31, 2016 was $294.2 million compared to $303.2 million for the year ended December 31, 2015, a decrease of $9.0 million or 3.0%.



78

Full Year 2017 Results of Operations - Insurance Segment
The following table presents underwriting results by line of business for the years ended December 31, 2017 and 2016:
 
 
Years Ended December 31,
 
 
2017
 
2016
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
 Total
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
397,292

 
$
580,952

 
$
474,889

 
$
1,453,133

 
$
371,221

 
$
397,602

 
$
425,314

 
$
1,194,137

Reinsurance premiums ceded
 
(130,554
)
 
(90,489
)
 
(40,012
)
 
(261,055
)
 
(78,676
)
 
(45,693
)
 
(38,300
)
 
(162,669
)
Net premiums written
 
266,738

 
490,463

 
434,877

 
1,192,078

 
292,545

 
351,909

 
387,014

 
1,031,468

Change in unearned premiums
 
(6,066
)
 
96,319

 
(26,246
)
 
64,007

 
(21,854
)
 
17,191

 
(23,861
)
 
(28,524
)
Net premiums earned
 
260,672

 
586,782

 
408,631

 
1,256,085

 
270,691

 
369,100

 
363,153

 
1,002,944

Other insurance related income
 
 
 
 
 
 
 
7,035

 
 
 
 
 
 
 
1,367

Total underwriting revenues
 
 
 
 
 
 
 
1,263,120

 
 
 
 
 
 
 
1,004,311

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
315,443

 
368,990

 
249,766

 
934,199

 
183,663

 
199,848

 
221,230

 
604,741

Policy acquisition costs
 
61,034

 
94,997

 
85,155

 
241,186

 
50,019

 
105,189

 
77,572

 
232,780

Total underwriting deductions before G&A
 
376,477

 
463,987

 
334,921

 
1,175,385

 
233,682

 
305,037

 
298,802

 
837,521

Underwriting (loss) income before G&A
 
$
(115,805
)
 
$
122,795

 
$
73,710

 
$
87,735

 
$
37,009

 
$
64,063

 
$
64,351

 
$
166,790

General and administrative expenses
 
 
 
 
 
 
 
207,186

 
 
 
 
 
 
 
165,529

Share compensation expenses
 
 
 
 
 
 
 
12,774

 
 
 
 
 
 
 
14,987

Total underwriting deductions
 
 
 
 
 
 
 
1,395,345

 
 
 
 
 
 
 
1,018,037

Underwriting (loss)
 
 
 
 
 
 
 
$
(132,225
)
 
 
 
 
 
 
 
$
(13,726
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
$
239,511

 
$
374,345

 
$
288,815

 
$
902,671

 
$
198,128

 
$
179,544

 
$
266,840

 
$
644,512

Current period—notable loss events
 
77,192

 
24,116

 
1,720

 
103,028

 
17,230

 
3,358

 
164

 
20,752

Current period—non-notable loss events
 
24,942

 
250

 
—

 
25,192

 
6,160

 
11,145

 
1

 
17,306

Change in prior accident years
 
(26,202
)
 
(29,721
)
 
(40,769
)
 
(96,692
)
 
(37,855
)
 
5,801

 
(45,775
)
 
(77,829
)
Total losses and loss expenses
 
$
315,443

 
$
368,990

 
$
249,766

 
$
934,199

 
$
183,663

 
$
199,848

 
$
221,230

 
$
604,741

Selected ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
67.1
 %
 
84.4
 %
 
91.6
 %
 
82.0
 %
 
78.8
 %
 
88.5
%
 
91.0
 %
 
86.4
 %
Losses and loss expense ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
91.9
 %
 
63.8
 %
 
70.7
 %
 
71.9
 %
 
73.1
 %
 
48.6
%
 
73.5
 %
 
64.3
 %
Current period—notable loss events
 
29.6
 %
 
4.1
 %
 
0.4
 %
 
8.2
 %
 
6.4
 %
 
0.9
%
 
—
 %
 
2.1
 %
Current period—non-notable loss events
 
9.6
 %
 
—
 %
 
—
 %
 
2.0
 %
 
2.3
 %
 
3.0
%
 
—
 %
 
1.7
 %
Change in prior accident years
 
(10.1
)%
 
(5.1
)%
 
(10.0
)%
 
(7.7
)%
 
(14.0
)%
 
1.6
%
 
(12.6
)%
 
(7.8
)%
Losses and loss expense ratio
 
121.0
 %
 
62.8
 %
 
61.1
 %
 
74.4
 %
 
67.8
 %
 
54.1
%
 
60.9
 %
 
60.3
 %
Policy acquisition cost ratio
 
23.4
 %
 
16.2
 %
 
20.8
 %
 
19.2
 %
 
18.5
 %
 
28.5
%
 
21.4
 %
 
23.2
 %
General and administrative expense ratio
 
 
 
 
 
 
 
17.5
 %
 
 
 
 
 
 
 
18.0
 %
Expense ratio
 
 
 
 
 
 
 
36.7
 %
 
 
 
 
 
 
 
41.2
 %
Combined ratio
 
 
 
 
 
 
 
111.1
 %
 
 
 
 
 
 
 
101.5
 %

79

Highlights for the year ended December 31, 2017 as compared to the year ended December 31, 2016 were as follows:
•
Gross premiums written for the year ended December 31, 2017 were $1,453.1 million compared to $1,194.1 million for the year ended December 31, 2016, an increase of $259.0 million, or 21.7% and included the following:
•
Property premiums of $397.3 million during the year ended December 31, 2017, compared to $371.2 million during the year ended December 31, 2016, an increase of $26.1 million or 7.0%. The increase was primarily driven by the continued build out of product offerings in the U.S. short-tail property lines;
•
Specialty - short-tail premiums of $581.0 million during the year ended December 31, 2017, compared to $397.6 million during the year ended December 31, 2016, an increase of $183.4 million or 46.1%. The increase was primarily driven by new agriculture business written through CRS and was partially offset by decreases in the marine, accident and health and contingency classes as a result of the non-renewal of various programs due to the current rate environment and premium adjustments on prior period policies; and
•
Specialty - other premiums of $474.9 million during the year ended December 31, 2017, compared to $425.3 million during the year ended December 31, 2016, an increase of $49.6 million or 11.7%. The increase was primarily driven by an increase in liability classes as a result of the continued build out of the Company’s U.S. underwriting platform and new financial lines business written.
•
Reinsurance premiums ceded for the year ended December 31, 2017 were $261.1 million compared to $162.7 million for the year ended December 31, 2016, an increase of $98.4 million or 60.5%. The increase was primarily driven by an increase in ceded agriculture premiums of $45.7 million relating to new business written through CRS, reinstatement premiums ceded of $22.9 million from 2017 notable loss events and new reinsurance coverage purchased following the 2017 notable loss events.
•
Net premiums earned for the year ended December 31, 2017 were $1,256.1 million compared to $1,002.9 million for the year ended December 31, 2016, an increase of $253.1 million or 25.2%. The increase was primarily due to the acquisition of CRS.
•
Losses and loss expenses for the year ended December 31, 2017 were $934.2 million compared to $604.7 million for the year ended December 31, 2016, an increase of $329.5 million or 54.5% and included the following:
Notable Loss Events
•
Losses and loss expenses incurred during the year ended December 31, 2017 from notable loss events were $103.0 million, or 8.2 percentage points of the loss ratio. Including reinstatement premiums ceded of $22.9 million, the net loss attributable to the Insurance segment from 2017 notable loss events was $125.9 million as follows:
 
 
Year Ended December 31, 2017
 
 
Notable Loss Events
(Dollars in thousands)
 
Hurricane Harvey
 
Hurricane Irma
 
Hurricane Maria
 
Northern California Wildfires
 
Southern California Wildfires
 
Total
Net losses and loss expenses
 
$
34,711

 
$
35,329

 
$
18,351

 
$
10,250

 
$
4,387

 
$
103,028

Reinstatement premiums, net
 
15,680

 
5,259

 
1,978

 
—

 
—

 
22,917

Net loss attributable to Insurance segment
 
$
50,391

 
$
40,588

 
$
20,329

 
$
10,250

 
$
4,387

 
$
125,945

Net losses and loss expenses from the 2017 notable loss events by line of business were as follows:
 
 
Year Ended December 31, 2017
 
 
Notable Loss Events
(Dollars in thousands)
 
Hurricane Harvey
 
Hurricane Irma
 
Hurricane Maria
 
Northern California Wildfires
 
Southern California Wildfires
 
Total
Property
 
$
22,759

 
$
24,648

 
$
17,398

 
$
8,250

 
$
4,137

 
$
77,192

Specialty - Short-tail
 
11,020

 
9,893

 
953

 
2,000

 
250

 
24,116

Specialty - Other
 
932

 
788

 
—

 
—

 
—

 
1,720

Net losses and loss expenses
 
$
34,711

 
$
35,329

 
$
18,351

 
$
10,250

 
$
4,387

 
$
103,028


80

•
Losses and loss expenses incurred during the year ended December 31, 2016 from notable loss events were $20.8 million, or 2.1 percentage points of the loss ratio. Net of reinstatement premiums $0.4 million, the net loss attributable to the Insurance segment from these 2016 notable loss events was $20.3 million and was incurred by event as follows:
 
 
Year Ended December 31, 2016
 
 
Notable Loss Events
(Dollars in thousands)
 
Canadian
Wildfires
 
Hurricane
Matthew
 
2016 New Zealand Earthquake
 
Total
Net losses and loss expenses
 
3,263

 
15,239

 
2,250

 
20,752

Reinstatement premiums, net
 
(411
)
 
—

 
—

 
(411
)
Net loss attributable to Insurance segment
 
$
2,852

 
$
15,239

 
$
2,250

 
$
20,341

Net losses and loss expenses from the 2016 notable loss events by line of business were as follows:
 
 
Year Ended December 31, 2016
 
 
Notable Loss Events
(Dollars in thousands)
 
Canadian
Wildfires
 
Hurricane
Matthew
 
2016 New Zealand Earthquake
 
Total
Property
 
3,059

 
11,921

 
2,250

 
17,230

Specialty - Short-tail
 
204

 
3,154

 
—

 
3,358

Specialty - Other
 
—

 
164

 
—

 
164

Net losses and loss expenses
 
$
3,263

 
$
15,239

 
$
2,250

 
$
20,752

Non-notable Loss Events
•
Losses and loss expenses incurred during the year ended December 31, 2017 from non-notable loss events were $25.2 million, or 2.0 percentage points of the loss ratio. Including reinstatement premiums ceded of $1.9 million, the net loss attributable to the Insurance segment from 2017 non-notable loss events was $27.1 million and was incurred by event as follows:
 
 
Year Ended December 31, 2017
 
 
Non-notable Loss Events
(Dollars in thousands)
 
Energy
Loss Event
 
Mexico City Earthquake
 
Total
Net losses and loss expenses
 
16,476

 
8,716

 
25,192

Reinstatement premiums, net
 
1,921

 
—

 
1,921

Net loss attributable to Insurance segment
 
$
18,397

 
$
8,716

 
$
27,113

Net losses and loss expenses from the 2017 notable loss events by line of business were as follows:
 
 
Year Ended December 31, 2017
 
 
Non-notable Loss Events
(Dollars in thousands)
 
Energy
Loss Event
 
Mexico City Earthquake
 
Total
Property
 
16,476

 
8,466

 
24,942

Specialty - Short-tail
 
—

 
250

 
250

Specialty - Other
 
—

 
—

 
—

Net losses and loss expenses
 
$
16,476

 
$
8,716

 
$
25,192


81

•
Losses and loss expenses incurred during the year ended December 31, 2016 from non-notable loss events were $17.3 million, or 1.7 percentage points of the loss ratio. Net of reinstatement premiums of $1.0 million, the net loss attributable to the Insurance segment from 2016 non-notable loss events was $16.3 million and was incurred by event as follows:
 
 
Year Ended December 31, 2016
 
 
Non-notable Loss Events
(Dollars in thousands)
 
Texas Hailstorms
 
Kumamoto Earthquake
 
Jubilee Oil
 
SpaceX
 
Total
Net losses and loss expenses
 
$
5,877

 
$
285

 
$
518

 
$
10,626

 
$
17,306

Reinstatement premiums, net
 
(31
)
 
—

 
(961
)
 
(25
)
 
(1,017
)
Net loss attributable to Insurance segment
 
$
5,846

 
$
285

 
$
(443
)
 
$
10,601

 
$
16,289

Net losses and loss expenses from the 2016 non-notable loss events by line of business were as follows:
 
 
Year Ended December 31, 2016
 
 
Non-notable Loss Events
(Dollars in thousands)
 
Texas Hailstorms
 
Kumamoto Earthquake
 
Jubilee Oil
 
SpaceX
 
Total
Property
 
$
5,875

 
$
285

 
$
—

 
$
—

 
$
6,160

Specialty - Short-tail
 
1

 
—

 
518

 
10,626

 
11,145

Specialty - Other
 
1

 
—

 
—

 
—

 
1

Net losses and loss expenses
 
$
5,877

 
$
285

 
$
518

 
$
10,626

 
$
17,306

Attritional losses
•Attritional losses during the year ended December 31, 2017 were $902.7 million, or 71.9 percentage points of the loss ratio compared to $644.5 million, or 64.3 percentage points of the loss ratio during the year ended December 31, 2016. The increase was primarily driven by the addition of CRS and a higher frequency of mid-size losses which did not meet the non-notable loss threshold.
Change in prior accident years
◦
Loss reserve development for the years ended December 31, 2017 and 2016 was as follows:
 
 
Year Ended December 31, 2017
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
(Favorable) development on event losses
 
$
(658
)
 
$
(6,481
)
 
$
(328
)
 
$
(7,467
)
(Favorable) development on attritional losses
 
(25,544
)
 
(23,240
)
 
(40,441
)
 
(89,225
)
Change in prior accident years
 
$
(26,202
)
 
$
(29,721
)
 
$
(40,769
)
 
$
(96,692
)
The favorable development on events for the year ended December 31, 2017 primarily related to favorable development on the 2015 Pemex oil refinery explosion.
 
 
Year Ended December 31, 2016
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
(Favorable) adverse development on event losses
 
$
(5,002
)
 
$
22,088

 
$
(213
)
 
$
16,873

(Favorable) development on attritional losses
 
(32,853
)
 
(16,287
)
 
(45,562
)
 
(94,702
)
Change in prior accident years
 
$
(37,855
)
 
$
5,801

 
$
(45,775
)
 
$
(77,829
)
The net favorable development for the year ended December 31, 2016 was primarily driven by favorable development on attritional losses and was partially offset by adverse development in the specialty - short-tail lines related to reserves established following the receipt of a loss advice on an individual marine policy that incepted during the second half of 2015.
•
Loss ratio for the years ended December 31, 2017 and 2016 was 74.4% and 60.3%, respectively, an increase of 14.1 percentage points.

82

•
Policy acquisition cost ratio for the years ended December 31, 2017 and 2016 was 19.2% and 23.2%, respectively, a decrease of 4.0 percentage points. The decrease was primarily driven by new agriculture business written during the year ended December 31, 2017 which carries lower acquisition costs.
•
General and administrative expenses for the years ended December 31, 2017 and 2016 were $207.2 million and $165.5 million, respectively, an increase of $41.7 million or 25.2%. General and administrative expenses for the year ended December 31, 2017 included $30.6 million of CRS expenses, of which $4.7 million related to the amortization of intangible assets acquired. The remaining increase in general and administrative expenses was primarily driven by the continued build out of the Company’s U.S. underwriting platform and a higher allocation of costs to the segment during the year ended December 31, 2017.
•
Underwriting (loss) for the year ended December 31, 2017 was $(132.2) million compared to $(13.7) million for the year ended December 31, 2016, an increase of $118.5 million.


83

The following table presents underwriting results by line of business for the years ended December 31, 2016 and 2015:
 
 
Years Ended December 31,
 
 
2016
 
2015
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
 Total
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
371,221

 
$
397,602

 
$
425,314

 
$
1,194,137

 
$
334,370

 
$
440,735

 
$
416,094

 
$
1,191,199

Reinsurance premiums ceded
 
(78,676
)
 
(45,693
)
 
(38,300
)
 
(162,669
)
 
(83,323
)
 
(48,783
)
 
(38,012
)
 
(170,118
)
Net premiums written
 
292,545

 
351,909

 
387,014

 
1,031,468

 
251,047

 
391,952

 
378,082

 
1,021,081

Change in unearned premiums
 
(21,854
)
 
17,191

 
(23,861
)
 
(28,524
)
 
(6,719
)
 
30,453

 
(5,844
)
 
17,890

Net premiums earned
 
270,691

 
369,100

 
363,153

 
1,002,944

 
244,328

 
422,405

 
372,238

 
1,038,971

Other insurance related income
 
 
 
 
 
 
 
1,367

 
 
 
 
 
 
 
1,894

Total underwriting revenues
 
 
 
 
 
 
 
1,004,311

 
 
 
 
 
 
 
1,040,865

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
183,663

 
199,848

 
221,230

 
604,741

 
105,995

 
169,716

 
233,677

 
509,388

Policy acquisition costs
 
50,019

 
105,189

 
77,572

 
232,780

 
37,414

 
117,250

 
65,493

 
220,157

Total underwriting deductions before G&A
 
233,682

 
305,037

 
298,802

 
837,521

 
143,409

 
286,966

 
299,170

 
729,545

Underwriting income before G&A
 
$
37,009

 
$
64,063

 
$
64,351

 
$
166,790

 
$
100,919

 
$
135,439

 
$
73,068

 
$
311,320

General and administrative expenses
 
 
 
 
 
 
 
165,529

 
 
 
 
 
 
 
177,918

Share compensation expenses
 
 
 
 
 
 
 
14,987

 
 
 
 
 
 
 
13,669

Total underwriting deductions
 
 
 
 
 
 
 
1,018,037

 
 
 
 
 
 
 
921,132

Underwriting (loss) income
 
 
 
 
 
 
 
$
(13,726
)
 
 
 
 
 
 
 
$
119,733

Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
$
198,128

 
$
179,544

 
$
266,840

 
$
644,512

 
$
158,983

 
$
195,174

 
$
285,580

 
$
639,737

Current period—notable loss events
 
17,230

 
3,358

 
164

 
20,752

 
1,162

 
25,303

 
—

 
26,465

Current period—non-notable loss events
 
6,160

 
11,145

 
1

 
17,306

 
3,481

 
250

 
—

 
3,731

Change in prior accident years
 
(37,855
)
 
5,801

 
(45,775
)
 
(77,829
)
 
(57,631
)
 
(51,011
)
 
(51,903
)
 
(160,545
)
Total losses and loss expenses
 
$
183,663

 
$
199,848

 
$
221,230

 
$
604,741

 
$
105,995

 
$
169,716

 
$
233,677

 
$
509,388

Selected ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
78.8
 %
 
88.5
%
 
91.0
 %
 
86.4
 %
 
75.1
 %
 
88.9
 %
 
90.9
 %
 
85.7
 %
Losses and loss expense ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
73.1
 %
 
48.6
%
 
73.5
 %
 
64.3
 %
 
65.1
 %
 
46.2
 %
 
76.7
 %
 
61.6
 %
Current period—notable loss events
 
6.4
 %
 
0.9
%
 
—
 %
 
2.1
 %
 
0.5
 %
 
6.0
 %
 
—
 %
 
2.5
 %
Current period—non-notable loss events
 
2.3
 %
 
3.0
%
 
—
 %
 
1.7
 %
 
1.4
 %
 
0.1
 %
 
—
 %
 
0.4
 %
Change in prior accident years
 
(14.0
)%
 
1.6
%
 
(12.6
)%
 
(7.8
)%
 
(23.6
)%
 
(12.1
)%
 
(13.9
)%
 
(15.5
)%
Losses and loss expense ratio
 
67.8
 %
 
54.1
%
 
60.9
 %
 
60.3
 %
 
43.4
 %
 
40.2
 %
 
62.8
 %
 
49.0
 %
Policy acquisition cost ratio
 
18.5
 %
 
28.5
%
 
21.4
 %
 
23.2
 %
 
15.3
 %
 
27.8
 %
 
17.6
 %
 
21.2
 %
General and administrative expense ratio
 
 
 
 
 
 
 
18.0
 %
 
 
 
 
 
 
 
18.4
 %
Expense ratio
 
 
 
 
 
 
 
41.2
 %
 
 
 
 
 
 
 
39.6
 %
Combined ratio
 
 
 
 
 
 
 
101.5
 %
 
 
 
 
 
 
 
88.6
 %

84

Highlights for the year ended December 31, 2016 as compared to the year ended December 31, 2015 were as follows:
•
Gross premiums written for the year ended December 31, 2016 were $1,194.1 million compared to $1,191.2 million for the year ended December 31, 2015, an increase of $2.9 million, or 0.2% and included the following:
•
Property premiums of $371.2 million during the year ended December 31, 2016, compared to $334.4 million during the year ended December 31, 2015, an increase of $36.9 million or 11.0%, primarily driven by an increase of $46.6 million in the direct property classes as a result of the continued build out of the Company’s U.S. underwriting platform. The increase was partially offset by a decrease in the downstream energy and power class as a result of the non-renewal of various programs due to an unfavorable rate environment and the timing of renewals;
•
Specialty - short-tail premiums of $397.6 million during the year ended December 31, 2016, compared to $440.7 million during the year ended December 31, 2015, a decrease of $43.1 million or 9.8%, primarily driven by decreases in the marine and aviation classes as a result of reductions in our participation and non-renewals on various programs due to continued pressure on rates. Partially offsetting these decreases was an increase in the contingency class of business as a result of premium adjustments on prior period policies; and
•
Specialty - other premiums of $425.3 million during the year ended December 31, 2016, compared to $416.1 million during the year ended December 31, 2015, an increase of $9.2 million or 2.2%, primarily driven by an increase in financial lines business written during the year.
•
Reinsurance premiums ceded for the year ended December 31, 2016 were $162.7 million compared to $170.1 million for the year ended December 31, 2015, a decrease of $7.4 million or 4.4%. The decrease was primarily driven by a reduction in quota share premiums ceded in our property lines of business.
•
Net premiums earned for the year ended December 31, 2016 were $1,002.9 million compared to $1,039.0 million for the year ended December 31, 2015, a decrease of $36.0 million or 3.5%, primarily driven by decreases in the specialty - short-tail and specialty - other lines of $53.3 million and $9.1 million, respectively. The decrease in the specialty - short-tail lines was driven by the reduction in gross premiums written in the marine and aviation classes as noted above. The decrease in the specialty - other lines was primarily driven by slower earnings patterns on longer-term contracts and the discontinuation of underperforming liability classes of business. The decreases were partially offset by an increase in the property lines driven by the increase in gross premiums written as noted above.
•
Losses and loss expenses for the year ended December 31, 2016 were $604.7 million compared to $509.4 million for the year ended December 31, 2015, an increase of $95.4 million or 18.7% and included the following:
Notable Loss Events
•
Losses and loss expenses incurred during the year ended December 31, 2015 from notable loss events were $26.5 million, or 2.5 percentage points of the loss ratio. Net of reinstatement premiums of $1.4 million, the net loss attributable to the Insurance segment from these loss events was $25.1 million and was incurred by event as follows:
 
 
Year Ended December 31, 2015
 
 
Notable Loss Events
(Dollars in thousands)
 
Tianjin Port Explosion
 
Pemex Oil
Refinery Explosion
 
Total
Net losses and loss expenses
 
$
6,265

 
$
20,200

 
$
26,465

Reinstatement premiums, net
 
(798
)
 
(574
)
 
(1,372
)
Net loss attributable to Insurance segment
 
$
5,467

 
$
19,626

 
$
25,093

Net losses and loss expenses from the 2015 notable loss events by line of business were as follows:
 
 
Year Ended December 31, 2015
 
 
Notable Loss Events
(Dollars in thousands)
 
Tianjin Port Explosion
 
Pemex Oil
Refinery Explosion
 
Total
Property
 
$
1,162

 
$
—

 
$
1,162

Specialty - Short-tail
 
5,103

 
20,200

 
25,303

Specialty - Other
 
—

 
—

 
—

Net losses and loss expenses
 
$
6,265

 
$
20,200

 
$
26,465


85

Non-notable Loss Events
•
Losses and loss expenses incurred during the year ended December 31, 2015 from a single non-notable loss event, the 2015 Chilean Earthquake, were $3.7 million, or 0.4 percentage points of the loss ratio and related primarily to the property lines.
Attritional losses
•
Attritional losses during the year ended December 31, 2016 were $644.5 million, or 64.3 percentage points of the loss ratio compared to $639.7 million, or 61.6 percentage points of the loss ratio during the year ended December 31, 2015.
Change in prior accident years
◦
Loss reserve development for the year ended December 31, 2015 was as follows:
 
 
Year Ended December 31, 2015
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
(Favorable) development on event losses
 
$
(9,555
)
 
$
(6,256
)
 
$
(1,998
)
 
$
(17,809
)
(Favorable) development on attritional losses
 
(48,076
)
 
(44,755
)
 
(49,905
)
 
(142,736
)
Change in prior accident years
 
$
(57,631
)
 
$
(51,011
)
 
$
(51,903
)
 
$
(160,545
)
The favorable development on events in the property lines for the year ended December 31, 2015 was primarily related to the 2011 Thailand Floods notable loss event.
•
Loss ratio for the years ended December 31, 2016 and 2015 was 60.3% and 49.0%, respectively, an increase of 11.3 percentage points.
•
Policy acquisition cost ratio for the years ended December 31, 2016 and 2015 was 23.2% and 21.2%, respectively, an increase of 2.0 percentage points.
•
General and administrative expenses for the years ended December 31, 2016 and 2015 were $165.5 million and $177.9 million, respectively, a decrease of $12.4 million or 7.0%. The decrease was primarily due to a reduction in the performance bonus accrual and was partially offset by an increase in staff costs associated with the opening of new offices in the U.S.
•
Underwriting (loss) for the year ended December 31, 2016 was $(13.7) million compared to income of $119.7 million for the year ended December 31, 2015, an unfavorable movement of $133.5 million.


86

Full Year 2017, 2016 and 2015 Results of Operations - Asset Management Segment
The following table presents the Asset Management segment (loss) income on an asset manager basis for the years ended December 31, 2017, 2016 and 2015:
 
 
Years Ended December 31,
(Dollars in thousands)
 
2017
 
2016
 
2015
Fee revenues
 
 
 
 
 
 
Third party
 
$
20,349

 
$
18,771

 
$
19,661

Related party
 
2,150

 
3,329

 
5,309

Total fee revenues
 
22,499

 
22,100

 
24,970

Expenses
 
 
 
 
 
 
General and administrative expenses
 
12,904

 
10,233

 
12,115

Share compensation expenses
 
389

 
249

 
580

Finance expenses
 
137

 
947

 
9,312

Tax expense
 
8

 
90

 
—

Foreign exchange losses (gains)
 
7

 
19

 
(16
)
Total expenses
 
13,445

 
11,538

 
21,991

Income before investment (loss) income from funds and sidecars
 
9,054

 
10,562

 
2,979

Investment (loss) income from funds and sidecars (a)
 
 
 
 
 
 
AlphaCat Sidecars
 
79

 
607

 
5,504

AlphaCat ILS Funds - Lower Risk (b)
 
(3,102
)
 
8,901

 
7,491

AlphaCat ILS Funds - Higher Risk (b)
 
(22,662
)
 
7,471

 
8,428

BetaCat ILS Funds
 
536

 
3,623

 
1,702

PaCRe
 
—

 
(23
)
 
(3,949
)
Validus' share of investment (loss) income from funds and sidecars
 
(25,149
)
 
20,579

 
19,176

Asset Management segment (loss) income
 
$
(16,095
)
 
$
31,141

 
$
22,155

 
 
 
 
 
 
 
Gross premiums written
 
 
 
 
 
 
AlphaCat Sidecars
 
$
(181
)
 
$
(341
)
 
$
45,755

AlphaCat ILS Funds - Lower Risk (b)
 
128,295

 
112,222

 
91,363

AlphaCat ILS Funds - Higher Risk (b)
 
157,976

 
140,022

 
34,228

AlphaCat Direct (c)
 
26,729

 
18,499

 
4,780

Total
 
$
312,819

 
$
270,402

 
$
176,126

(a)
The investment (loss) income from funds and sidecars is based on equity accounting.
(b)
Lower risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of less than 7%, whereas higher risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of 7% or greater. The maximum permitted portfolio expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit.
(c)
AlphaCat Direct includes direct investments from a third party investor in AlphaCat Re.
Highlights for the for the year ended December 31, 2017 as compared to the year ended December 31, 2016 were as follows:
•
Total fee revenues earned for the year ended December 31, 2017 were $22.5 million compared to $22.1 million during the year ended December 31, 2016, an increase of $0.4 million or 1.8%. Third party fee revenues earned during the year ended December 31, 2017 were $20.3 million compared to $18.8 million, an increase of $1.6 million or 8.4%. The increase in third party fee revenues was primarily driven by an increase in management fees as a result of an increase in assets under management over the last twelve months.
•
Total expenses for the year ended December 31, 2017 were $13.4 million compared to $11.5 million during the year ended December 31, 2016, an increase of $1.9 million, or 16.5%. The increase was primarily driven by a higher allocation of costs to the Asset Management segment and was partially offset by a reduction in the bonus accrual during the year ended December 31, 2017.
•
Validus’ share of investment (loss) from funds and sidecars for the year ended December 31, 2017 was $(25.1) million compared to income of $20.6 million during the year ended December 31, 2016, a decrease of $45.7 million. The decrease was driven by the 2017 notable loss events.

87

•
Asset management segment (loss) for the year ended December 31, 2017 was $(16.1) million compared to income of $31.1 million during the year ended December 31, 2016, a decrease of $47.2 million.
Highlights for the for the year ended December 31, 2016 as compared to the year ended December 31, 2015 were as follows:
•
Total fee revenues earned for the year ended December 31, 2016 were $22.1 million compared to $25.0 million during the year ended December 31, 2015, a decrease of $2.9 million or 11.5%. Third party fee revenues earned during the year ended December 31, 2016 were $18.8 million compared to $19.7 million, a decrease of $0.9 million or 4.5%. The decrease in third party fee revenues was primarily attributable to a decrease in performance fees earned as a result of the 2016 notable and non-notable loss events.
•
Total expenses for the year ended December 31, 2016 were $11.5 million compared to $22.0 million during the year ended December 31, 2015, a decrease of $10.5 million, or 47.5%, primarily attributable to higher placement fees incurred in relation to raising new capital during 2015.
•
Validus’ share of investment income from funds and sidecars excluding PaCRe which was off-risk effective January 1, 2016, for the year ended December 31, 2016 was $20.6 million compared to $23.1 million during the year ended December 31, 2015, a decrease of $2.5 million, or 11.0%. The decrease of $2.5 million during the year ended December 31, 2016 as compared to 2015 was driven by the 2016 notable and non-notable loss events.
•
Asset management segment income for the year ended December 31, 2016 was $31.1 million compared to $22.2 million during the year ended December 31, 2015, an increase of $9.0 million or 40.6%.
Assets Under Management
 
 
Assets Under Management (a)
(Dollars in thousands)
 
January 1, 2018
 
January 1, 2017
Assets Under Management - Related Party (a)
 
 
 
 
AlphaCat Sidecars
 
$
5,631

 
$
7,729

AlphaCat ILS Funds - Lower Risk (b)
 
75,898

 
124,297

AlphaCat ILS Funds - Higher Risk (b)
 
68,290

 
83,881

AlphaCat Direct (c)
 
—

 
—

BetaCat ILS Funds
 
24,914

 
26,808

Total
 
$
174,733

 
$
242,715

 
 
 
 
 
Assets Under Management - Third Party (a)
 
 
 
 
AlphaCat Sidecars
 
$
20,565

 
$
28,829

AlphaCat ILS Funds - Lower Risk (b)
 
1,663,606

 
1,257,287

AlphaCat ILS Funds - Higher Risk (b)
 
1,029,224

 
738,813

AlphaCat Direct (c)
 
443,730

 
444,668

BetaCat ILS Funds
 
67,046

 
29,000

Total
 
3,224,171

 
2,498,597

Total Assets Under Management
 
$
3,398,904

 
$
2,741,312

(a)
The Company’s assets under management are based on NAV and are represented by investments made by related parties and third parties in the feeder funds and on a direct basis.
(b)
Lower risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of less than 7%, whereas higher risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of 7% or greater. The maximum permitted portfolio expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit.
(c)
AlphaCat Direct includes direct investments from third party investors in AlphaCat Re.
Assets under management were $3.4 billion as at January 1, 2018, compared to $2.7 billion as at January 1, 2017, of which third party assets under management were $3.2 billion as at January 1, 2018, compared to $2.5 billion as at January 1, 2017.
During the twelve months ended January 1, 2018, a total of $1,700.5 million of capital was raised, of which $1,674.3 million was raised from third parties. During the twelve months ended January 1, 2018, $700.9 million was returned to investors, of which $631.0 million was returned to third party investors.

88

Full Year 2017, 2016 and 2015 Results - Corporate and Investments
The following table presents the Corporate and Investment function’s income and expense items on a consolidated basis for the years ended December 31, 2017, 2016 and 2015:
 
 
Years Ended December 31,
(Dollars in thousands)
 
2017
 
2016
 
2015
Managed investments
 
 
 
 
 
 
Managed net investment income (a)
 
$
152,955

 
$
141,718

 
$
121,166

Net realized gains on managed investments (a)
 
7,437

 
14,680

 
1,698

Change in net unrealized gains (losses) on managed investments (a)
 
6,371

 
14,106

 
(32,007
)
Income (loss) from investment affiliates
 
22,010

 
(2,083
)
 
4,281

Total managed investment return
 
188,773

 
168,421

 
95,138

 
 
 
 
 
 
 
Corporate expenses
 
 
 
 
 
 
General and administrative expenses
 
48,598

 
72,249

 
75,724

Share compensation expenses
 
16,186

 
16,003

 
12,955

Finance expenses (a)
 
58,194

 
57,183

 
61,071

Dividends on preferred shares
 
15,861

 
4,455

 
—

Tax (benefit) expense (a)
 
(7,588
)
 
(19,819
)
 
6,376

Total Corporate expenses
 
131,251

 
130,071

 
156,126

 
 
 
 
 
 
 
Other items
 
 
 
 
 
 
Foreign exchange (losses) gains (a)
 
(8,544
)
 
10,778

 
(8,172
)
Other income (loss)
 
303

 
(766
)
 
(1,002
)
Transaction expenses
 
(4,427
)
 
—

 
—

Total other items
 
(12,668
)
 
10,012

 
(9,174
)
Total Corporate and Investments
 
$
44,854

 
$
48,362

 
$
(70,162
)
(a)
These items exclude the components which are included in the Asset Management segment income (loss) and amounts which are consolidated from VIEs.
Managed investments
Highlights for the year ended December 31, 2017 as compared to the year ended December 31, 2016 were as follows:
•
Managed net investment income for the year ended December 31, 2017 was $153.0 million compared to $141.7 million for the year ended December 31, 2016, an increase of $11.2 million, or 7.9%. The increase was primarily driven by strong performance from the Company’s fixed income funds.
•
Effective yield on managed investments for the year ended December 31, 2017 was 2.32%, compared to 2.24% for the year ended December 31, 2016, an increase of 8 basis points.
•
Net realized gains on managed investments for the year ended December 31, 2017 were $7.4 million compared to $14.7 million for the year ended December 31, 2016. The net realized gains for the year ended December 31, 2016 primarily resulted from the sale of managed fixed maturities and gains realized on the termination of two interest rate swap contracts which were entered into in the third quarter of 2016 to partially offset the impact of interest rate increases on the Company’s fixed maturity portfolio.
•
Change in net unrealized gains on managed investments for the year ended December 31, 2017 was $6.4 million compared to $14.1 million for the year ended December 31, 2016. The change in net unrealized gains on managed investments during the year ended December 31, 2017 were driven by the impact of rising interest rates on the Company’s managed fixed maturity portfolio.
•
Income from investment affiliates for the year ended December 31, 2017 was $22.0 million compared to a loss of $(2.1) million for the year ended December 31, 2016. The income from investment affiliates represents equity earnings on investments in funds managed by Aquiline Capital Partners LLC.

89

Highlights for the year ended December 31, 2016 as compared to the year ended December 31, 2015 were as follows:
•
Managed net investment income for the year ended December 31, 2016 was $141.7 million compared to $121.2 million for the year ended December 31, 2015, an increase of $20.6 million, or 17.0%. The increase was primarily driven by returns on the Company’s portfolio of structured securities, of which $16.7 million was generated from a single fixed income fund.
•
Effective yield on managed investments for the year ended December 31, 2016 was 2.24%, compared to 1.91% for the year ended December 31, 2015, an increase of 33 basis points.
•
Net realized gains on managed investments for the year ended December 31, 2016 were $14.7 million compared to $1.7 million for the year ended December 31, 2015. The net realized gains for the year ended December 31, 2016 primarily resulted from the sale of managed fixed maturities and gains realized on the termination of interest rate swap contracts as noted above.
•
Change in net unrealized gains on managed investments for the year ended December 31, 2016 was $14.1 million compared to (losses) of $(32.0) million for the year ended December 31, 2015. The changes in unrealized gains and (losses) on managed investments were primarily driven by the impact of changes in interest rates on the Company’s managed fixed maturity portfolio.
•
(Loss) from investment affiliates for the year ended December 31, 2016 was $(2.1) million compared to income of $4.3 million for the year ended December 31, 2015.
Corporate expenses and other items
Highlights for the year ended December 31, 2017 as compared to the year ended December 31, 2016 were as follows:
•
General and administrative expenses for the year ended December 31, 2017 were $48.6 million compared to $72.2 million for the year ended December 31, 2016, a decrease of $23.7 million, or 32.7%. The decrease was primarily driven by a reduction in the bonus accrual and a higher allocation of costs to reportable segments during the year ended December 31, 2017.
•
Share compensation expenses for the year ended December 31, 2017 were $16.2 million compared to $16.0 million for the year ended December 31, 2016, an increase of $0.2 million, or 1.1%.
•
Finance expenses for the year ended December 31, 2017 were $58.2 million compared to $57.2 million for the year ended December 31, 2016, an increase of $1.0 million, or 1.8%. The increase was primarily driven by interest expenses relating to short-term borrowings which were repaid in full during the year ended December 31, 2017.
•
Dividends paid on preferred shares for the year ended December 31, 2017 were $15.9 million compared to $4.5 million for the year ended December 31, 2016, an increase of $11.4 million, or 256.0%. The increase was due to $250.0 million of new Series B preferred shares issued during the second quarter of 2017 and a full year of dividends paid on the Company’s Series A preferred shares issued in June 2016.
•
Tax (benefit) for the year ended December 31, 2017 was $(7.6) million compared to $(19.8) million for the year ended December 31, 2016. The tax benefit during the year ended December 31, 2017 mainly related to operating losses in the Insurance segment and was partially offset by the re-measurement of net deferred taxes following the recently enacted 2017 Tax Act. The tax benefit during the year ended December 31, 2016 was primarily due to a partial release of a valuation allowance which had been applied against a deferred tax asset related to net operating losses acquired as part of the Company’s acquisition of Flagstone. The release was due to the Company believing it is more-likely-than-not that it will have sufficient future taxable income to realize a portion of that deferred tax asset over three years beginning in 2017 and in accordance with U.S. GAAP, the Company was required to record a tax benefit of $18.4 million during the fourth quarter of 2016.
•
Foreign exchange (losses) for the year ended December 31, 2017 were $(8.5) million compared to gains of $10.8 million for the year ended December 31, 2016, an unfavorable movement of $19.3 million. The unfavorable movement was primarily driven by the British pound sterling and Euro strengthening against the U.S. dollar during the year ended December 31, 2017.
•
Transaction expenses for the year ended December 31, 2017 were $4.4 million compared to $nil for the year ended December 31, 2016. Transaction expenses are primarily comprised of legal, financial advisory and audit related services incurred in connection with the acquisition of CRS, which was completed on May 1, 2017.

90

Highlights for the year ended December 31, 2016 as compared to the year ended December 31, 2015 were as follows:
•
General and administrative expenses for the year ended December 31, 2016 were $72.2 million compared to $75.7 million for the year ended December 31, 2015, a decrease of $3.5 million, or 4.6%. The decrease was primarily driven by a reduction in the performance bonus accrual.
•
Share compensation expenses for the year ended December 31, 2016 were $16.0 million compared to $13.0 million for the year ended December 31, 2015, an increase of $3.0 million, or 23.5%, primarily due to increased performance share award grants.
•
Finance expenses for the year ended December 31, 2016 were $57.2 million compared to $61.1 million for the year ended December 31, 2015, a decrease of $3.9 million, or 6.4%, primarily due to reduced credit facility expenses.
•
Dividends paid on preferred shares for the year ended December 31, 2016 were $4.5 million compared to $nil for the year ended December 31, 2015. The Company issued $150.0 million of preferred shares in June 2016.
•
Tax (benefit) for the year ended December 31, 2016 was $(19.8) million compared to tax expense of $6.4 million for the year ended December 31, 2015. The favorable movement of $26.2 million during the year ended December 31, 2016 as compared to 2015 was driven by the partial release of a valuation allowance which had been applied against a deferred tax asset during the fourth quarter of 2016 as noted above.
•
Foreign exchange gains for the year ended December 31, 2016 were $10.8 million compared to (losses) of $(8.2) million for the year ended December 31, 2015, a favorable movement of $19.0 million, or 231.9%, primarily attributable to the U.S. dollar strengthening against the British pound sterling during the year ended December 31, 2016.





91

Liquidity and Capital Resources
Investments
Managed investments represent assets governed by the Company’s IPS whereas, non-managed investments represent assets held in support of consolidated AlphaCat VIEs which are not governed by the Company’s IPS. Refer to Note 9 to the Consolidated Financial Statements, “Variable interest entities,” in Part II, Item 8 for further details.
The fair value of the Company’s investments, cash and cash equivalents and restricted cash as at December 31, 2017 and December 31, 2016 was as follows:
 
Fair Value
 
December 31, 2017
 
December 31, 2016
Managed investments, cash and cash equivalents and restricted cash
 
 
 
Fixed maturities
 
 
 
U.S. government and government agency
$
727,397

 
$
804,126

Non-U.S. government and government agency
312,239

 
240,791

U.S. states, municipalities and political subdivisions
201,303

 
271,830

Agency residential mortgage-backed securities
978,049

 
679,595

Non-agency residential mortgage-backed securities
40,373

 
15,477

U.S. corporate
1,533,395

 
1,534,508

Non-U.S. corporate
422,249

 
410,227

Bank loans
442,951

 
570,399

Asset-backed securities
658,303

 
526,814

Commercial mortgage-backed securities
312,395

 
330,932

Total fixed maturities
5,628,654

 
5,384,699

Short-term investments
230,011

 
228,386

Other investments
 
 
 
Fund of hedge funds
—

 
955

Hedge funds
15,774

 
17,381

Private equity investments
78,407

 
82,627

Fixed income investment funds
204,426

 
249,275

Overseas deposits
56,611

 
50,106

Mutual funds
—

 
5,368

Total other investments
355,218

 
405,712

Investments in investment affiliates (a)
100,137

 
100,431

Cash and cash equivalents
691,687

 
415,419

Restricted cash
62,848

 
15,000

Total managed investments, cash and cash equivalents and restricted cash
$
7,068,555

 
$
6,549,647

 
 
 
 
Non-managed investments, cash and cash equivalents and restricted cash
 
 
 
Catastrophe bonds
$
229,694

 
$
158,331

Short-term investments
3,151,746

 
2,567,784

Cash and cash equivalents
63,303

 
4,557

Restricted cash
331,815

 
55,956

Total non-managed investments, cash and cash equivalents and restricted cash
3,776,558

 
2,786,628

Total investments and cash
$
10,845,113

 
$
9,336,275

(a)
The Company’s investments in investment affiliates have been treated as equity method investments with the corresponding gains and losses recorded in income as “Income (loss) from investment affiliates.”
As at December 31, 2017, the Company’s managed cash and investment portfolio totaled $7.1 billion (December 31, 2016: $6.5 billion). Refer to Note 7 to the Consolidated Financial Statements, “Investments,” in Part II, Item 8 for further details related to the Company’s managed investments.
A significant portion of (re)insurance contracts written by the Company provide short-tail reinsurance coverage for losses resulting mainly from natural and man-made catastrophes, which could result in payment of a substantial amount of losses at short notice. Accordingly, the Company’s investment portfolio is primarily structured to provide liquidity, which means the investment

92

portfolio contains a significant amount of relatively short-term fixed maturity investments. The Company’s IPS specifically requires certain minimum thresholds of cash, short-term investments, and highly-rated fixed maturity securities relative to our consolidated net reserves and estimates of probable maximum loss exposures at the 1 in 100 year threshold to provide necessary liquidity in a wide range of reasonable scenarios. As such, the Company structures its managed cash and investment portfolio to support policyholder reserves and contingent risk exposures with a liquid portfolio of high quality fixed-income investments with a comparable duration profile.
The Company’s IPS requires managed investments to have an average duration in the range of 0.75 years to 3.25 years. At December 31, 2017, the average duration of the Company’s managed investment portfolio was 2.17 years (December 31, 2016: 2.17 years). This duration is reviewed regularly based on changes in the duration of the Company’s liabilities and general market conditions.
The Company’s IPS also requires certain minimum credit quality standards for its managed fixed maturity portfolio, including a minimum weighted average portfolio rating of A+ for securities with ratings. Further limits on asset classes and security types are also mandated. In addition, the Company stress-tests the downside risks within its asset portfolio using internal and external inputs and stochastic modeling processes to help define and limit asset risks to acceptable levels that are consistent with our overall ERM framework. At December 31, 2017, the Company’s rated managed fixed maturity portfolio had an average credit quality rating of AA- (December 31, 2016: AA-). Refer to Note 7(a) to the Consolidated Financial Statements, “Investments,” in Part II, Item 8 for further details related to the investment ratings of the Company’s fixed maturity portfolio.
The value of the Company’s managed fixed maturity portfolio will fluctuate with, among other factors, changes in the interest rate environment and in overall economic conditions. Additionally, the structure of the Company’s overall managed investment portfolio exposes the Company to other risks, including insolvency or reduced credit quality of corporate debt securities, prepayment, default and structural risks on asset-backed securities, mortgage-backed securities and bank loans and liquidity risks on certain other investments, including hedge funds, fixed income investment funds and private equity investments. For further details on market risks, refer to Part I, Item 7A “Quantitative And Qualitative Disclosures About Market Risk.”
As part of the ongoing risk management process, the Company monitors the aggregation of country or jurisdiction risk exposure. Jurisdiction risk exposure is the risk that events within a jurisdiction, such as currency crises, regulatory changes and other political events, will adversely affect the ability of obligors within the jurisdiction to honor their obligations. The following table provides a breakdown of the fair value of jurisdiction risk exposures outside the United States within the Company’s managed fixed maturity portfolio:
 
 
December 31, 2017
(Dollars in thousands)
 
Fair Value
 
% of Total
Germany
 
$
71,287

 
9.7
%
Supranational
 
60,200

 
8.2
%
Canada
 
38,805

 
5.3
%
Province of Ontario
 
31,069

 
4.2
%
United Kingdom
 
19,886

 
2.7
%
France
 
14,066

 
1.9
%
Netherlands
 
10,348

 
1.4
%
Other (individual jurisdictions below $10,000)
 
66,578

 
9.1
%
Total Managed Non-U.S. Government Securities
 
312,239

 
42.5
%
European Corporate Securities
 
139,779

 
19.0
%
U.K. Corporate Securities
 
122,534

 
16.7
%
Other Non-U.S. Corporate Securities
 
159,936

 
21.8
%
Total Managed Non-U.S. Fixed Maturity Portfolio
 
$
734,488

 
100.0
%

93

 
 
December 31, 2016
(Dollars in thousands)
 
Fair Value
 
% of Total
Germany
 
$
66,886

 
10.3
%
Supranational
 
41,502

 
6.4
%
United Kingdom
 
36,178

 
5.6
%
Canada
 
15,836

 
2.4
%
Province of Ontario
 
12,387

 
1.9
%
Norway
 
12,085

 
1.9
%
France
 
10,360

 
1.6
%
Jordan
 
10,080

 
1.5
%
Other (individual jurisdictions below $10,000)
 
35,477

 
5.4
%
Total Managed Non-U.S. Government Securities
 
240,791

 
37.0
%
European Corporate Securities
 
173,326

 
26.6
%
U.K. Corporate Securities
 
96,425

 
14.8
%
Other Non-U.S. Corporate Securities
 
140,476

 
21.6
%
Total Managed Non-U.S. Fixed Maturity Portfolio
 
$
651,018

 
100.0
%
At December 31, 2017, the Company did not have an aggregate exposure to any single issuer of more than 0.9% (December 31, 2016: 1.0%) of managed cash and investments, other than with respect to government and agency securities. The top ten exposures to fixed income corporate issuers at December 31, 2017 and 2016 were as follows:
 
 
December 31, 2017
Issuer (a)
 
Fair Value (b)
 
Rating (c)
 
% of Managed Investments, Cash and Cash Equivalents and Restricted Cash
JPMorgan Chase & Co.
 
$
67,079

 
 BBB+
 
0.9
%
Citigroup Inc.
 
59,438

 
 BBB+
 
0.8
%
Morgan Stanley
 
56,503

 
 BBB+
 
0.8
%
Bank of America Corp.
 
51,579

 
 A-
 
0.7
%
Goldman Sachs Group
 
49,679

 
 BBB+
 
0.7
%
Wells Fargo & Company
 
45,545

 
 A
 
0.6
%
AT&T Inc.
 
34,615

 
 BBB+
 
0.5
%
HSBC Holdings plc
 
33,972

 
 A
 
0.5
%
Bank of New York Mellon Corp.
 
32,592

 
 A
 
0.5
%
Capital One Financial Corporation
 
29,145

 
 BBB+
 
0.4
%
Total
 
$
460,147

 
 
 
6.4
%

94

 
 
December 31, 2016
Issuer (a)
 
Fair Value (b)
 
Rating (c)
 
% of Managed Investments, Cash and Cash Equivalents and Restricted Cash
JPMorgan Chase & Co
 
$
66,827

 
BBB+
 
1.0
%
Citigroup Inc.
 
52,737

 
BBB
 
0.8
%
Bank of America Corp
 
50,280

 
BBB+
 
0.8
%
Morgan Stanley
 
48,273

 
BBB+
 
0.7
%
Goldman Sachs Group
 
46,261

 
BBB+
 
0.7
%
Wells Fargo & Company
 
44,596

 
A
 
0.7
%
Anheuser-Busch Inbev NV
 
39,674

 
A-
 
0.6
%
Bank of New York Mellon Corp
 
34,619

 
A
 
0.5
%
HSBC Holdings plc
 
29,411

 
A
 
0.4
%
US Bancorp
 
28,175

 
AA-
 
0.4
%
Total
 
$
440,853

 
 
 
6.6
%
(a)
Issuers exclude government-backed government-sponsored enterprises and cash and cash equivalents.
(b)
Credit exposures represent only direct exposure to fixed maturities and short-term investments of the parent issuer and its major subsidiaries. These exposures exclude asset and mortgage backed securities that were issued, sponsored or serviced by the parent.
(c)
Investment ratings are the median of Moody’s, Standard & Poor’s and Fitch, presented in Standard & Poor’s equivalent rating. For investments where three ratings are unavailable, the lower of the ratings shall apply, presented as the Standard & Poor’s equivalent rating.

Reserve for Losses and Loss Expenses
At December 31, 2017 and 2016, gross and net reserves for losses and loss expenses were estimated using the methodology as outlined in the Critical Accounting Policies and Estimates section below. The following tables indicate the breakdown of gross and net reserves for losses and loss expenses between lines of business and between case reserves and IBNR.
 
 
December 31, 2017
 
December 31, 2016
(Dollars in thousands)
 
Gross Case Reserves
 
Gross IBNR
 
Total Gross Reserve for
Losses and Loss Expenses
 
Gross Case Reserves
 
Gross IBNR
 
Total Gross Reserve for
Losses and Loss Expenses
Property
 
$
893,180

 
$
1,398,563

 
$
2,291,743

 
$
390,141

 
$
440,531

 
$
830,672

Specialty - Short-tail
 
515,450

 
930,062

 
1,445,512

 
509,317

 
676,337

 
1,185,654

Specialty - Other
 
345,214

 
748,921

 
1,094,135

 
338,314

 
640,555

 
978,869

Total
 
$
1,753,844

 
$
3,077,546

 
$
4,831,390

 
$
1,237,772

 
$
1,757,423

 
$
2,995,195

 
 
December 31, 2017
 
December 31, 2016
(Dollars in thousands)
 
Net Case Reserves
 
Net IBNR
 
Total Net Reserve for
Losses and Loss Expenses
 
Net Case Reserves
 
Net IBNR
 
Total Net Reserve for
Losses and Loss Expenses
Property
 
$
732,289

 
$
820,301

 
$
1,552,590

 
$
330,213

 
$
392,886

 
$
723,099

Specialty - Short-tail
 
435,201

 
653,693

 
1,088,894

 
443,460

 
555,377

 
998,837

Specialty - Other
 
310,904

 
645,005

 
955,909

 
298,771

 
544,067

 
842,838

Total
 
$
1,478,394

 
$
2,118,999

 
$
3,597,393

 
$
1,072,444

 
$
1,492,330

 
$
2,564,774



95

The following table sets forth a reconciliation of gross and net reserves for losses and loss expenses by operating segment for the year ended December 31, 2017.
 
 
Year Ended December 31, 2017
(Dollars in thousands)
 
Reinsurance Segment
 
Insurance Segment
 
Asset Management Segment
 
Total
Reserve for losses and loss expenses, beginning of year
 
$
1,193,497

 
$
1,753,164

 
$
48,534

 
$
2,995,195

Loss reserves recoverable
 
(108,528
)
 
(321,893
)
 
—

 
(430,421
)
Net reserves for losses and loss expenses, beginning of year
 
1,084,969

 
1,431,271

 
48,534

 
2,564,774

Net reserves acquired (a)
 
—

 
23,753

 
—

 
23,753

Increase (decrease) in net reserves for losses and loss expenses in respect of losses occurring in:
 
 
 
 
 
 
 
 
Current year
 
806,021

 
1,030,891

 
685,799

 
2,522,711

Prior years
 
(113,302
)
 
(96,692
)
 
(12,539
)
 
(222,533
)
Total net incurred losses and loss expenses
 
692,719

 
934,199

 
673,260

 
2,300,178

Foreign exchange loss (gain)
 
31,205

 
16,908

 
1,004

 
49,117

Less net losses and loss expenses paid in respect of losses occurring in:
 
 
 
 
 
 
 
 
Current year
 
(238,550
)
 
(318,014
)
 
(44,313
)
 
(600,877
)
Prior years
 
(301,820
)
 
(428,546
)
 
(9,186
)
 
(739,552
)
Total net paid losses
 
(540,370
)
 
(746,560
)
 
(53,499
)
 
(1,340,429
)
Net reserves for losses and loss expenses, end of year
 
1,268,523

 
1,659,571

 
669,299

 
3,597,393

Loss reserves recoverable
 
548,131

 
640,866

 
45,000

 
1,233,997

Reserve for losses and loss expenses, end of year
 
$
1,816,654

 
$
2,300,437

 
$
714,299

 
$
4,831,390

(a)
Equals net reserves acquired of $42,575 less net reserves commuted at closing of $18,822.
For further information regarding the Company’s reserves for losses and loss expenses refer to Note 13 to the Consolidated Financial Statements, “Reserve for losses and loss expenses,” in Part II, Item 8. The amount of recorded reserves represents management’s best estimate of expected losses and loss expenses on premiums earned. For the year ended December 31, 2017, favorable loss reserve development on prior accident years was $222.5 million, of which $113.3 million related to the Reinsurance segment, $96.7 million related to the Insurance segment and $12.5 million related to the Asset Management segment.
The management of (re)insurance companies use significant judgment in the estimation of reserves for losses and loss expenses. Given the magnitude of some notable loss events and other uncertainties inherent in loss estimation, meaningful uncertainty remains regarding the estimation for these events. The Company’s actual ultimate net loss may vary materially from these estimates. Ultimate losses for notable loss events are estimated through detailed review of contracts which are identified by the Company as potentially exposed to the specific notable loss event. However, there can be no assurance that the ultimate loss amount estimated for a specific contract will be accurate, or that all contracts with exposure to a specific notable loss event will be identified in a timely manner. Potential losses in excess of the estimated ultimate loss assigned to a contract on the basis of a specific review, or loss amounts from contracts not specifically included in the detailed review may be reserved for in the reserve for potential development on notable loss events (“RDE”) and would be included as part of the Company’s overall reserves. As at December 31, 2017, the Company had no RDE.

96

For disclosure purposes, only those notable loss events which have an ultimate loss estimate above $30.0 million are disclosed separately and included in the reserves for notable loss event roll forward table below. To the extent that there are increased complexity and volatility factors relating to notable loss events in the aggregate, RDE may be established for a specific accident year.
 
 
 
 
Year Ended December 31, 2015
 
Year Ended December 31, 2016
 
Year Ended December 31, 2017
2015 Notable Loss Events
 
Initial estimate (a)
 
Development (Favorable) / Unfavorable
 
Closing
Estimate (b)
 
Development (Favorable) / Unfavorable
 
Closing
Estimate (b)
 
Development (Favorable) / Unfavorable
 
Closing
Estimate (b)
Pemex Oil
Refinery Explosion
 
$
48,073

 
$
1,464

 
$
49,537

 
$
(426
)
 
$
49,111

 
$
(13,341
)
 
$
35,770

Tianjin Port Explosion
 
47,789

 
(362
)
 
47,427

 
(11,645
)
 
35,782

 
(4,508
)
 
31,274

Total
 
$
95,862

 
$
1,102

 
$
96,964

 
$
(12,071
)
 
$
84,893

 
$
(17,849
)
 
$
67,044

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paid Loss
 
Closing Reserve (c)
 
Paid Loss
 
Closing Reserve (c)
 
Paid Loss
 
Closing Reserve (c)
Pemex Oil
Refinery Explosion
 
 
 
$
44

 
$
49,493

 
$
166

 
$
48,901

 
$
26,306

 
$
9,254

Tianjin Port Explosion
 
 
 
—

 
47,427

 
12,754

 
23,028

 
5,536

 
12,984

Total
 
 
 
$
44

 
$
96,920

 
$
12,920

 
$
71,929

 
$
31,842

 
$
22,238

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016 Notable Loss Events
 
Initial estimate (a)
 
 
 
 
 
Development (Favorable) / Unfavorable
 
Closing
Estimate (b)
 
Development (Favorable) / Unfavorable
 
Closing
Estimate (b)
Canadian Wildfires
 
$
36,915

 
 
 
 
 
$
(17,265
)
 
$
19,650

 
$
(162
)
 
$
19,488

Hurricane Matthew
 
39,140

 
 
 
 
 
—

 
39,140

 
9,222

 
48,362

2016 New Zealand Earthquake
 
31,421

 
 
 
 
 
—

 
31,421

 
—

 
31,421

Total
 
$
107,476

 
 
 
 
 
$
(17,265
)
 
$
90,211

 
$
9,060

 
$
99,271

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paid Loss
 
Closing
Reserve (c)
 
Paid Loss
 
Closing
Reserve (c)
Canadian Wildfires
 
 
 
 
 
 
 
$
5,676

 
$
13,974

 
$
4,074

 
$
9,738

Hurricane Matthew
 
 
 
 
 
 
 
6,712

 
32,428

 
25,090

 
16,560

2016 New Zealand Earthquake
 
 
 
 
 
 
 
—

 
31,421

 
817

 
30,604

Total
 
 
 
 
 
 
 
$
12,388

 
$
77,823

 
$
29,981

 
$
56,902

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2017 Notable Loss Events
 
Initial estimate (a)
 
 
 
 
 
 
 
 
 
Development (Favorable) / Unfavorable
 
Closing
Estimate (b)
Hurricane Harvey
 
$
247,409

 
 
 
 
 
 
 
 
 
$
65,795

 
$
313,204

Hurricane Irma
 
518,559

 
 
 
 
 
 
 
 
 
(60,414
)
 
458,145

Hurricane Maria
 
160,207

 
 
 
 
 
 
 
 
 
(10,856
)
 
149,351

Northern California Wildfires
 
87,754

 
 
 
 
 
 
 
 
 
—

 
87,754

Southern California Wildfires
 
38,495

 
 
 
 
 
 
 
 
 
—

 
38,495

Total
 
$
1,052,424

 
 
 
 
 
 
 
 
 
$
(5,475
)
 
$
1,046,949

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paid Loss
 
Closing Reserve (c)
Hurricane Harvey
 
 
 
 
 
 
 
 
 
 
 
$
59,010

 
$
254,194

Hurricane Irma
 
 
 
 
 
 
 
 
 
 
 
119,045

 
339,100

Hurricane Maria
 
 
 
 
 
 
 
 
 
 
 
9,817

 
139,534

Northern California Wildfires
 
 
 
 
 
 
 
 
 
 
 
12,172

 
75,582

Southern California Wildfires
 
 
 
 
 
 
 
 
 
 
 
—

 
38,495

Total
 
 
 
 
 
 
 
 
 
 
 
$
200,044

 
$
846,905

(a)
Includes paid losses, case reserves and IBNR reserves.
(b)
Excludes impact of movements in foreign exchange rates.
(c)
Closing Reserve for the period equals closing estimate for the period less cumulative paid losses.

97

Sources of Liquidity
Holding Company Liquidity
Validus Holdings, Ltd. is a holding company and conducts no operations of its own. The Company relies primarily on cash dividends and other permitted payments from operating subsidiaries within the Reinsurance, Insurance, and Asset Management segments to pay dividends, finance expenses and other holding company expenses. There are restrictions on the payment of dividends from most operating subsidiaries, primarily due to regulatory requirements in the jurisdictions in which the operating subsidiaries are domiciled. Refer to Part I, Item 1 “Regulation,” and Note 26 to the Consolidated Financial Statements, “Statutory and regulatory requirements,” in Part II, Item 8 for further discussion on the regulatory requirements in the jurisdictions in which the Company operates. Also refer to Part II, Item 5, “Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities,” for further discussion of the Company’s dividend policy. The Company believes the dividend/distribution capacity of the Company’s subsidiaries will provide the Company with sufficient liquidity for the foreseeable future. The Company continues to generate substantial cash from operating activities and remains in a strong financial position, with resources available for reinvestment in existing businesses, strategic acquisitions and managing capital structure to meet its short and long-term objectives.
The following table details the capital resources of certain subsidiaries of the Company on an unconsolidated basis:
(Dollars in thousands)
 
December 31, 2017
 
December 31, 2016
Validus Reinsurance, Ltd. (excluding capital supporting FAL) (a) (b)
 
$
3,898,905

 
$
3,720,595

Talbot Holdings, Ltd. (including capital supporting FAL) (b)
 
824,946

 
914,442

Other, net
 
(44,057
)
 
(14,158
)
Redeemable noncontrolling interests in AlphaCat
 
1,004,094

 
1,528,001

Noncontrolling interests in AlphaCat
 
16,718

 
165,977

Total consolidated capitalization
 
5,700,606

 
6,314,857

Senior notes payable
 
(245,564
)
 
(245,362
)
Debentures payable
 
(539,158
)
 
(537,226
)
Redeemable noncontrolling interests in AlphaCat
 
(1,004,094
)
 
(1,528,001
)
Total shareholders’ equity
 
3,911,790

 
4,004,268

Preferred shares (c)
 
(400,000
)
 
(150,000
)
Noncontrolling interests in AlphaCat
 
(16,718
)
 
(165,977
)
Total shareholders’ equity available to Validus common shareholders (c)
 
$
3,495,072

 
$
3,688,291

(a)
Validus Reinsurance, Ltd. (excluding capital supporting FAL) includes capital of $702,932 (December 31, 2016: $639,113) relating to Western World Insurance Group, Inc.
(b)
Validus Reinsurance, Ltd. (excluding capital supporting FAL) excludes capital of $599,077 (December 31, 2016: $723,888) which supports Talbot’s FAL. This capital was included in Talbot Holdings, Ltd. (including capital supporting FAL).
(c)
Total shareholders’ equity available to Validus common shareholders excludes the liquidation value of the preferred shares.
Sources and Uses of Cash
The Company has written certain (re)insurance business that has loss experience generally characterized as having low frequency and high severity. This results in volatility in both results and operational cash flows. The potential for large claims or a series of claims under one or more reinsurance contracts means that substantial and unpredictable payments may be required within relatively short periods of time. As a result, cash flows from operating activities may fluctuate, perhaps significantly, between individual quarters and years. Management believes the Company’s unused credit facility amounts and highly liquid investment portfolio are sufficient to support any potential operating cash flow deficiencies.
In addition to relying on premiums received and investment income from the investment portfolio, the Company intends to meet these cash flow demands by carrying a substantial amount of short and medium term investments that would mature, or possibly be sold, prior to the settlement of expected liabilities. The Company cannot provide assurance, however, that it will successfully match the structure of its investments with its liabilities due to uncertainty related to the timing and severity of loss events.

98

There are three main sources of cash flows for the Company: operating activities, investing activities and financing activities. The movement in net cash provided by or used in operating, investing and financing activities and the effect of foreign currency rate changes on cash and cash equivalents for the years ended December 31, 2017, 2016 and 2015 is provided in the following table:
 
 
Years Ended December 31,
(Dollars in thousands)
 
2017
 
2016
 
2015
Net cash provided by operating activities
 
$
389,734

 
$
410,203

 
$
334,506

Net cash used in investing activities
 
(971,424
)
 
(994,107
)
 
(470,567
)
Net cash provided by financing activities
 
1,228,167

 
301,089

 
226,641

Effect of foreign currency rate changes on cash and cash equivalents
 
12,244

 
(22,632
)
 
(17,605
)
Net increase (decrease) in cash and cash equivalents and restricted cash
 
$
658,721

 
$
(305,447
)
 
$
72,975

Operating Activities
Cash flow from operating activities is derived primarily from the receipt of premiums less the payment of losses and loss expenses related to underwriting activities.
Net cash provided by operating activities during the years ended years ended December 31, 2017, 2016 and 2015 was $389.7 million, $410.2 million and $334.5 million, respectively.
The unfavorable movement of $(20.5) million during the year ended December 31, 2017 compared to 2016 was primarily due to the timing of cash receipts and payments, notably with regard to premiums receivable and losses payable, respectively. The favorable movement of $75.7 million during the year ended December 31, 2016 compared to 2015 was primarily due to the timing of loss payments.
We anticipate that cash flows from operations will continue to be sufficient to cover cash outflows under our contractual commitments as well as most loss scenarios through the foreseeable future. Refer to the “Capital Resources” section below for further information on our anticipated obligations.
Investing Activities
Cash flow used in investing activities is primarily from net purchases made in the Company’s investment portfolio. As at December 31, 2017, the Company’s portfolio was composed of fixed income, short-term and other investments and investments in investment affiliates amounting to $9.7 billion or 89.4% of total cash and investments. For further details related to investments pledged as collateral, refer to Note 7 to the Consolidated Financial Statements, “Investments,” in Part II, Item 8.
Net cash used in investing activities during the years ended December 31, 2017, 2016 and 2015 was $971.4 million, $994.1 million and $470.6 million, respectively.
The decrease in net cash used in investing activities of $22.7 million during the year ended December 31, 2017 compared to 2016 was primarily driven by lower net purchases of investments and was partially offset by cash used to fund the Company’s acquisition of CRS. The increase in net cash used in investment activities of $523.5 million during the year ended December 31, 2016 compared to 2015 was primarily due to an increase in purchases of short-term investments in the Company’s non-managed portfolio primarily on behalf of AlphaCat investors of $419.3 million and an increase in the purchase of other investments of $59.0 million.
Financing Activities
Cash flow from financing activities is derived primarily from the issuance and purchase of shares in the Company and its subsidiaries, including third party investments in the funds and sidecars, as well as the issuance of notes payable to AlphaCat investors, and is partially offset by repurchases of shares in the Company and the payment of dividends.
Net cash provided by financing activities during the years ended December 31, 2017, 2016 and 2015 was $1,228.2 million, $301.1 million and $226.6 million, respectively.
The favorable movement of $927.1 million during the year ended December 31, 2017 compared to 2016 was primarily driven by an increase of $96.8 million resulting from the issuance of preferred shares during 2017, an increase of $206.0 million resulting from proceeds drawn on credit facilities, a reduction in share repurchases of $186.1 million and a net increase in third party investments from AlphaCat investors of $474.1 million, primarily driven by the timing of the receipt and deployment of third party capital. The favorable movement of $74.4 million during the year ended December 31, 2016 compared to 2015 was primarily driven by an increase of $144.9 million resulting from the issuance of preferred shares during 2016 and was partially offset by a net reduction in third party investments from AlphaCat investors of $86.5 million. The net reduction in third party investments from AlphaCat investors was primarily driven by the timing of the receipt and deployment of third party capital.

99

Capital Resources
The following table details the Company’s capital position as at December 31, 2017 and 2016:
(Dollars in thousands)
 
December 31, 2017
 
December 31, 2016
Senior Notes (a)
 
$
245,564

 
$
245,362

Junior Subordinated Deferrable Debentures (JSDs) (a)
 
289,800

 
289,800

Flagstone Junior Subordinated Deferrable Debentures (JSDs) (a)
 
249,358

 
247,426

Total debt
 
784,722

 
782,588

 
 
 
 
 
Redeemable noncontrolling interests
 
1,004,094

 
1,528,001

 
 
 
 
 
Preferred shares, liquidation value (b)
 
400,000

 
$
150,000

Ordinary shares, capital and surplus available to Validus common shareholders
 
3,517,264

 
3,711,507

Accumulated other comprehensive loss
 
(22,192
)
 
(23,216
)
Noncontrolling interests
 
16,718

 
165,977

Total shareholders' equity
 
$
3,911,790

 
$
4,004,268

 
 
 
 
 
Total capitalization (c)
 
$
5,700,606

 
$
6,314,857

Total capitalization available to Validus (d)
 
$
4,679,794

 
$
4,620,879

 
 
 
 
 
Debt to total capitalization
 
13.8
%
 
12.4
%
Debt (excluding JSDs) to total capitalization
 
4.3
%
 
3.9
%
Debt and preferred shares to total capitalization
 
20.8
%
 
14.8
%
 
 
 
 
 
Debt to total capitalization available to Validus
 
16.8
%
 
16.9
%
Debt (excluding JSDs) to total capitalization available to Validus
 
5.2
%
 
5.3
%
Debt and preferred shares to total capitalization available to Validus
 
25.3
%
 
20.2
%
(a)
Refer to Part II, Item 8, Note 19 to the Consolidated Financial Statements, “Debt and financing arrangements,” for further details and discussion on the debt and financing arrangements of the Company.
(b)
Refer to Part II, Item 8, Note 16 to the Consolidated Financial Statements, “Share capital,” for further details and discussion on the Company’s preferred shares.
(c)
Total capitalization equals total shareholders’ equity plus redeemable noncontrolling interests and total debt.
(d)
Total capitalization available to Validus equals total capitalization (as per (c)) less redeemable noncontrolling interests and noncontrolling interests.
Shareholders’ Equity
Shareholders’ equity available to Validus common shareholders at December 31, 2017 was $3.5 billion, compared to $3.7 billion at December 31, 2016. Including the liquidation value of preferred shares, shareholders’ equity available to Validus at December 31, 2017 was $3.9 billion, compared to $3.8 billion at December 31, 2016.
On February 7, 2018, the Company announced a quarterly cash dividend of $0.38 per common share, payable on March 29, 2018 to shareholders of record on March 15, 2018. The Company also announced a quarterly cash dividend of $0.3671875 and $0.3625000 per depository share on the outstanding Series A and Series B Preferred Shares, respectively. The Series A and Series B Preferred Share dividends are payable on March 15, 2018 to shareholders of record on March 1, 2018.
The timing and amount of any future cash dividends, however, will be at the discretion of the Board and will depend upon results of operations and cash flows, the Company’s financial position and capital requirements, general business conditions, legal, tax, regulatory, rating agency and contractual constraints or restrictions and any other factors that the Board deems relevant.
The Company may from time to time repurchase its securities, including common shares, Junior Subordinated Deferrable Debentures and Senior Notes. On February 3, 2015, the Board of Directors of the Company approved an increase in the Company’s common share repurchase authorization to $750.0 million.
The Company has repurchased 81,035,969 common shares for an aggregate purchase price of $2.7 billion from the inception of the share repurchase program to February 27, 2018. The Company had $293.4 million remaining under its authorized share repurchase program as of February 27, 2018.
The Company expects the purchases under its share repurchase program to be made from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program will depend on a variety

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of factors, including market conditions, the Company’s capital position relative to internal and rating agency targets, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board of Directors at any time.
Debt and financing arrangements
For additional information about our debt, including the terms of our financing arrangements, basis for interest rates and debt covenants, refer to Part II, Item 8, Note 19 to the Consolidated Financial Statements, “Debt and financing arrangements.”
Noncontrolling interests
Investors in certain of the AlphaCat and BetaCat ILS funds have rights that enable them, subject to certain limitations, to redeem their shares. Such investments held by third parties are therefore recorded in the Company’s Consolidated Balance Sheets as redeemable noncontrolling interests, a mezzanine item between liabilities and shareholders’ equity. If and when a redemption notice is received, the fair value of the redemption is reclassified to accounts payable and accrued expenses. As at December 31, 2017 and 2016, the amount of the Company’s total capitalization owed to third parties as redeemable noncontrolling interests was $1.0 billion and $1.5 billion, respectively.
The AlphaCat sidecars and one of the AlphaCat ILS funds have no shareholder redemption rights. Therefore, the third party equity is recorded in the Company’s Consolidated Balance Sheets as noncontrolling interests. As at December 31, 2017 and 2016, the amount of the Company’s total capitalization owed to third parties as noncontrolling interests was $16.7 million and $166.0 million, respectively. Refer to Part II, Item 8, Notes 9 and 10 to the Consolidated Financial Statements, “Variable Interest Entities,” and “Noncontrolling interests,” respectively, for further details.
Contractual Obligations and Commitments
The Company’s contractual obligations and commitments as at December 31, 2017 are set out below:
 
 
Payment Due by Period
(Dollars in thousands)
 
Total
 
Less Than
1 Year
 
1 - 3 Years
 
3 - 5 Years
 
More Than
5 Years
Reserve for losses and loss expenses (a)
 
$
4,831,390

 
$
1,990,511

 
$
1,946,516

 
$
574,039

 
$
320,324

Long term debt obligations (b)
 
1,876,306

 
53,673

 
107,346

 
107,346

 
1,607,941

Projected pension benefit obligation (c)
 
11,955

 
277

 
7,649

 
107

 
3,922

Operating lease obligations
 
97,568

 
13,610

 
25,405

 
18,613

 
39,940

Private equity and investment commitments (d)
 
234,775

 
234,775

 
—

 
—

 
—

Other commitments (e)
 
1,317,567

 
1,317,567

 
—

 
—

 
—

Total contractual obligations and commitments
 
$
8,369,561

 
$
3,610,413

 
$
2,086,916

 
$
700,105

 
$
1,972,127

(a)
The reserve for losses and loss expenses represents an estimate, including actuarial and statistical projections at a given point in time of an insurer’s or reinsurer’s expectations of the ultimate settlement and administration costs of claims incurred. As such, the actual payment of the reserve for losses and loss expenses will differ from estimated payouts. Refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates” for further details and discussion on the Company’s reserve for losses and loss expenses.
(b)
The amounts in the table above reflect the Company’s contractual obligations with respect to the principal and interest payments on the Company’s Senior Notes and JSDs. The Company has entered into interest rate swaps which fix the rates of interest on the JSDs. The terms of the swaps are matched to the maturity date of the JSDs. Refer to Part II, Item 8, Note 19 to the Consolidated Financial Statements, “Debt and financing arrangements,” for further details and discussion on the debt and financing arrangements of the Company.
(c)
Refer to Part II, Item 8, Note 18 to the Consolidated Financial Statements, “Retirement and pension plans,” for further details describing the projected pension benefit obligation.
(d)
The private equity and investment commitments do not have a defined contractual commitment date and are therefore included in the less than one year category. Refer to Part II, Item 8, Note 22 to the Consolidated Financial Statements, “Commitments and contingencies,” for further details describing these contractual obligations and commitments.
(e)
Other commitments include notes payable to AlphaCat investors, amounts drawn on credit facilities and commitments related to the Company’s structured settlements. Refer to Part II, Item 8, Note 9 to the Consolidated Financial Statements, “Variable interest entities,” Note 19 to the Consolidated Financial Statements “Debt and financing arrangements,” and Note 22 to the Consolidated Financial Statements, “Commitments and contingencies,” for further details describing these contractual obligations and commitments.


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Goodwill and Intangible Assets
The Company has performed an impairment analysis of its carried goodwill and intangible assets as required by U.S. GAAP. Based on this analysis, management has concluded that an impairment adjustment is not required against the carried goodwill and carried intangible assets. For information about goodwill and intangible assets refer to Note 6 to the Consolidated Financial Statements, “Goodwill and intangible assets,” in Part II, Item 8.
Off-Balance Sheet Arrangements
The Company is not party to any off-balance sheet transaction, agreement or other contractual arrangement as defined by Item 303(a) (4) of Regulation S-K to which an entity unconsolidated with the Company is a party that management believes is reasonably likely to have a current or future effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that the Company believes is material to investors.
For further details related to the Company’s variable interest entities, refer to Note 9 to the Consolidated Financial Statements, “Variable interest entities,” in Part II, Item 8.
Ratings
The following table summarizes the financial strength ratings of the Company and its principal (re)insurance subsidiaries from internationally recognized rating agencies as of February 28, 2018:
 
A.M. Best
 
S&P
 
Moody’s
 
Fitch
Validus Holdings, Ltd.
 
 
 
 
 
 
 
Issuer credit rating
bbb
 
BBB+
 
Baa1
 
A-
Senior debt
bbb
 
BBB+
 
Baa1
 
BBB+
Subordinated debt
bbb-
 
—
 
—
 
BBB
Preferred stock
bb+
 
BBB-
 
Baa3
 
BBB
Outlook on ratings
Developing (a)
 
Negative
 
Stable
 
Stable
 
 
 
 
 
 
 
 
Validus Reinsurance, Ltd.
 
 
 
 
 
 
 
Financial strength rating
A
 
A
 
A2
 
A
Outlook on ratings
Stable
 
Stable
 
Stable
 
Stable
 
 
 
 
 
 
 
 
Lloyd’s of London
 
 
 
 
 
 
 
Financial strength rating applicable to all Lloyd’s syndicates
A
 
A+
 
—
 
AA-
Outlook on ratings
Stable
 
Negative
 
—
 
Negative
 
 
 
 
 
 
 
 
Validus Reinsurance (Switzerland) Ltd
 
 
 
 
 
 
 
Financial strength rating
A
 
A
 
—
 
—
Outlook on ratings
Stable
 
Stable
 
—
 
—
 
 
 
 
 
 
 
 
Western World Insurance Company
 
 
 
 
 
 
 
Financial strength rating
A
 
—
 
—
 
—
Outlook on ratings
Stable
 
—
 
—
 
—
(a)
A.M. Best has placed all Validus Holdings, Ltd. ratings “under review with developing implications” following the announcement by the Company of the entry into a definitive agreement and plan of merger with AIG on January 22, 2018. The ratings will remain under review until the transaction closes and A.M. Best completes its evaluation of organizational changes and strategic position within the new structure.




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Critical Accounting Policies and Estimates
The Company’s Consolidated Financial Statements have been prepared in accordance with U.S. GAAP. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect reported and disclosed amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities as at the Balance Sheet date and the reported amounts of revenues and expenses during the reporting period. Management believes the following accounting policies are critical to the Company’s financial reporting as the application of these policies requires management to make significant judgments. Management believes the estimates that require the most subjective and complex judgments are (1) reserve for losses and loss expenses, (2) premiums, (3) reinsurance premiums ceded and reinsurance recoverables (4) investment valuation and (5) the valuation of goodwill and intangible assets.
Reserve for Losses and Loss Expenses
Description: The Company believes that the most significant accounting judgment made by management is our estimate of reserve for losses and loss expenses. The Company establishes its reserve for losses and loss expenses to cover the estimated remaining liability for both reported claims (“case reserves”) and unreported amounts (“incurred but not reported” or “IBNR” reserves). For (re)insurance business, the IBNR reserves include provision for loss incidents that have occurred but have not yet been reported to the Company as well as for future variation in case reserves (where the claim has been reported but the ultimate cost is not yet known). The provision for future variation in current case reserves is generally calculated using actuarial estimates of total IBNR at the aggregated line of business level. Additional individual claim IBNR amounts are sometimes calculated for larger claims within our (re)insurance businesses. Within the reinsurance business, the portion of total IBNR related to future variation on known claims is calculated at the individual claim level in some instances (either as an additional case reserve or individual claim IBNR). Within the insurance business, the provision for future variation in current case reserves is generally calculated using actuarial estimates of total IBNR, while individual claim IBNR amounts are sometimes calculated for larger claims. IBNR is established by the Company separately for certain large or catastrophe losses and smaller “attritional” losses. The Company has procedures in place to aggregate large or catastrophe losses on a consolidated basis for financial reporting and disclosure purposes. Loss events which have a net loss estimate at or above $30.0 million on a consolidated basis are disclosed separately and included in the reserves for notable loss events roll forward table. In addition, non-notable loss events which aggregate to $15.0 million or more but less than $30.0 million on a consolidated basis are disclosed separately and included in the Company’s analysis of losses and loss expenses. Notable and non-notable loss events are first determined at the respective operating company and are then aggregated and only disclosed if it is determined that they reach the respective consolidated threshold for notable and non-notable loss event disclosure.
For all lines of business, the Company’s reserve for losses and loss expenses and loss reserves recoverable consist of three categories: (1) case reserves, (2) in certain circumstances, additional case reserves (“ACR”), and (3) IBNR reserves. The reserves and recoverables for attritional and large or catastrophe losses are established on an annual and interim basis as follows:
1.Case reserves:    Case reserves generally are analyzed and established by each segment’s claims department on all lines, making use of third party input where appropriate (including, for the reinsurance business, reports of losses from ceding companies). For insurance business where Talbot is not the lead underwriter, the case reserves are established by the lead underwriter and validated centrally by the Lloyd’s market claims bureau, with a sample reviewed by the Company.
2.ACR:    ACR are established for our reinsurance business by our claims department in cases where we believe the case reserves reported by the cedant requires adjustment. ACR supplement case reserves based on information obtained through ceding company audits or other sources. ACR are not generally used for our insurance business as claim volumes are generally greater and thus the potential for future variation in case reserve estimates on known claims often can be analyzed at an aggregate level using historical data.
3.IBNR reserves:
a.Large or catastrophe events—IBNR reserves are established for all lines based on each segment’s estimates for known loss events for which not all claims have been reported to the Company. In establishing such IBNR reserves, the Company accumulates loss information from modeling agencies, where possible, publicly available sources and information contained in client reports and estimates. The loss information is applied to the Company’s book of in-force contracts to establish an estimate of the Company’s ultimate exposure to the loss event. For the largest loss events, the Company estimates an ultimate loss expectation for the individual event. Paid losses, case reserves and any additional case reserves are then deducted from the ultimate loss to ascertain the IBNR estimate for these individual large claims or catastrophe events. The size of event for which the Company establishes a separate ultimate loss estimate may vary based on an assessment of the materiality of the event, as well as on other factors such as complexity and volatility.

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b.Attritional losses—IBNR reserves are established using some combination of the actuarial methods described above, including the Chain Ladder method, the Generalized Cape Cod method and the Bornhuetter-Ferguson method. In situations where limited historic development data is available and/or the year being analyzed is more recent (less mature), the expected loss method and the Bornhuetter-Ferguson method are more commonly used. Under all methods used, an ultimate loss amount is established. Paid losses, case reserves and any additional case reserves are then deducted from the ultimate loss to ascertain the attritional IBNR reserves.
For all case reserves, ACR and IBNR, net reserves are estimated by first estimating gross reserves, then estimating reinsurance recoverables.
Judgments and Uncertainties: Loss reserve estimates for (re)insurance business are not precise in that they deal with the inherent uncertainty in the outcome of (re)insurance claims made on the Company, many of which have not yet been reported to the Company. Estimating loss reserves requires management to make assumptions, both explicit and implicit, regarding future paid and reported loss development patterns, frequency and severity trends, claims settlement practices, potential changes in the legal environment and other factors. These estimates and judgments are based on numerous factors, and may be revised over time as additional experience or other data becomes available, as new or improved methodologies are developed or as current laws change.
As predominantly a broker market (re)insurer, the Company must rely on loss information reported to us by brokers from clients, where such information is often incomplete or changing. The quality and type of information received varies by client and by the nature of the business, insurance or reinsurance.
For insurance business, the Company receives from brokers details of potential claims, on the basis of which the Company’s loss adjusters make estimates of the likely ultimate outcome of the claims. In determining these reserves, the Company takes into account a number of factors including the facts and circumstances of the individual claim, the nature of the coverage and historical information about its experience on similar types of claims. For insurance business where Talbot is not the lead underwriter, the case reserves are established by the lead underwriter and validated centrally by the Lloyd’s market claims bureau, with a sample reviewed by the Company. The sum of the individual claim estimates for lead and follow business constitutes the case reserves.
For reinsurance business, the Company typically receives from brokers details of paid losses and estimated case reserves recorded by the ceding company. In addition to this, the ceding company’s estimated provision for IBNR losses is sometimes also available, although this in itself introduces additional uncertainty owing to the differing and typically unknown reserving practices of ceding companies.
There will also be a time lag between a loss occurring and it being reported, first by the original claimant to its insurer, via the insurance broker, and, for reinsurance business, subsequently from the insurer to the reinsurer via the reinsurance broker.
The Company writes a mix of predominantly short-tail business, both insurance and reinsurance. The combination of low claim frequency and high claim severity that is characteristic of much of this short-tail business makes the available data more volatile and less reliable for predicting ultimate losses. For example, in property lines, there can be additional uncertainty in loss estimation related to large catastrophe events, whether natural or man-made. With wind events, such as hurricanes, the damage assessment process may take more than a year. The cost of claims is also subject to volatility due to supply shortages for construction materials and labor. In the case of earthquakes, the damage assessment process may take longer as buildings are discovered to have structural weaknesses not initially detected.
The Company also writes longer tail lines of business in both its Reinsurance and Insurance segments. The Reinsurance segment’s longer tail lines of business include casualty and financial lines. The Insurance segment’s longer tail lines of business include financial, liability (including general liability, professional liability, products liability, and miscellaneous malpractice), marine and energy liability, political risk, and products and airports. These longer tail lines represent 20.9% of the Company’s gross premiums written for the year ended December 31, 2017. In contrast to our short-tail business, the claim tail for our longer tail lines of business is expected to be notably longer as claims are often reported and ultimately paid or settled years after the related loss event occurs. In the intervening period between occurrence, reporting and settlement, additional facts regarding individual claims and trends will often become known and current laws and case law may change, affecting the ultimate value of the claim.
Taken together, these issues add considerable uncertainty to the process of estimating ultimate losses, hence loss reserves, and this uncertainty is increased for reinsurance business compared with insurance business due to the additional parties in the chain of reporting from the original claimant to the reinsurer.

104

As a result of the uncertainties described above, the Company must estimate IBNR reserves, which consist of a provision for future development on known loss events, as well as a provision for claims which have occurred but which have not yet been reported to us by clients. Because of the degree of reliance that is necessarily placed on brokers and (re)insured companies for claims reporting, the associated time lag, the low frequency/high severity nature of much of the business underwritten, the rapidly emerging and changing nature of facts and circumstances surrounding large events and, for reinsurance business, the varying reserving practices among ceding companies as described above, reserve estimates are highly dependent on management’s judgment and are subject to uncertainty.
The Company strives to take account of these uncertainties in the judgments and assumptions made when establishing loss reserves, but it is not possible to eliminate the uncertainties. As a result, there is a risk that the Company’s actual losses may be higher or lower than the reserves booked.
For the Company’s insurance business, where a longer reserving history exists, the Company examines the development of its own historical paid and incurred losses to identify trends, which it then incorporates into the reserving process where it deems appropriate.
For the Company’s reinsurance business, where the Company relies more heavily on information provided by clients in order to assist it in estimating reserves, the Company performs certain processes in order to help assess the completeness and accuracy of such information as follows:
1.In addition to information received from clients on reported claims, the Company also uses information on the patterns of client loss reporting and loss settlements from previous events in order to estimate the Company’s ultimate liability related to these events;
2.The Company uses reinsurance industry information in order to perform consistency checks on the data provided by ceding companies and to identify trends in loss reporting and settlement activity. Where it deems appropriate, the Company incorporates such information in establishing reinsurance reserves; and
3.For both insurance and reinsurance business, the Company supplements the loss information received from clients with loss estimates developed by market share techniques and third party catastrophe models when such information is available.
Although there is normally a lag in receiving reinsurance data from cedants, the Company currently has adequate procedures in place regarding the timeliness related to the processing of assumed reinsurance information and there is no significant backlog. The Company actively manages its relationships with brokers and clients and considers existing disputes with counterparties to be in the normal course of business.
As described above, the reserve for losses and loss expenses includes both a component for outstanding case reserves for claims which have been reported and a component for IBNR reserves. IBNR reserves are the difference between ultimate losses and reported losses, where reported losses are the sum of paid losses and outstanding case reserves. Ultimate losses are estimated by management using various actuarial methods, including exposure-based and loss-based methods, as well as other qualitative assessments regarding claim trends.
The Company uses a reserving methodology that establishes a point estimate for ultimate losses. The point estimate represents management’s best estimate of ultimate losses and loss expenses. The Company does not select a range as part of its loss reserving process. The extent of reliance on management judgment in the reserving process differs depending on the circumstances surrounding the estimations, including the volume and credibility of data, the perceived relevance of historical data to future conditions, the level of stability in the Company’s operational processes for handling losses (including claims practices and systems) and other factors. The Company reviews its reserving assumptions and methodologies on a quarterly basis. Two of the most critical assumptions in establishing reserves are loss emergence patterns and expected loss ratios. Loss emergence patterns are critical to the reserving process as they can be one key indicator of the ultimate liability. A pattern of reported loss emergence which is different from expectations may indicate a change in the loss climate and may thus influence the estimate of future payments that should be reflected in reserves. Expected loss ratios are a primary component in the Company’s calculation of estimated ultimate losses for business at an early stage in its development.
Loss emergence patterns for the business written by our Insurance segment are generally derived from its own historic loss development triangulations and in some instances, the Company’s Lloyd’s business is also supplemented by market data. For the reinsurance business written by our Reinsurance and Asset Management segments, where its own historic loss development triangulations are currently more limited, greater use is made of market data including reinsurance industry data available from organizations such as statistical bureaus and consulting firms, where appropriate. Expected loss ratios are estimated in a variety of ways, largely dependent upon the data available. Wherever it deems appropriate, management incorporates the Company’s own loss experience in establishing initial expected loss ratios and reserves. This is particularly true for the business written by our Insurance segment where a longer reserving history exists and expected losses and loss ratios consider, among other things, rate increases and changes in terms and conditions that have been observed in the market. For reinsurance business, expected losses and loss ratios are

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typically developed using vendor and proprietary computer models. The information used in these models is collected by underwriters and actuaries during the initial pricing of the business.
The Company has large catastrophe event ultimate loss reserve estimation procedures for the investigation, analysis, and estimation of ultimate losses resulting from large catastrophe events. The determination regarding which events follow these procedures is made by members of senior management from relevant departments within the Company. The procedures are designed to facilitate the communication of information between various relevant functions and provide an efficient approach to determining the estimated loss for the event.
In developing estimates for large catastrophe events, the Company considers various sources of information including: specific loss estimates reported by our cedants and policyholders, overall insurance industry loss estimates reported by our brokers and by claims reporting services, proprietary and third party vendor models and internal data regarding insured or reinsured exposures related to the geographical location of the event. Use of these various sources enables management to estimate the ultimate loss for known events with a higher degree of accuracy and timeliness than if the Company relied solely on one data source. Indicated ultimate loss estimates for catastrophe events are compiled by a committee of management, and these indicated ultimate losses are incorporated into the process of selecting management’s best estimate of reserves.
As with large catastrophe events, the Company separately estimates ultimate losses for certain large claims using a number of methods, including estimation based on vendor models, analyses of specific industry occurrences and facts, as well as information from cedants and policyholders on individual contract involvements.
During 2010 and 2011, given the complexity and severity of notable loss events, explicit RDE on 2010 and 2011 notable loss events were included within the Company’s IBNR reserving process. As uncertainties surrounding initial estimates on notable loss events developed, this reserve has been allocated to specific notable loss events. No RDE was established for notable loss events incurred between 2012 through 2017.
The requirement for a reserve for potential development on notable loss events in a quarter is a function of (a) the number of significant events occurring in that quarter and (b) the complexity and volatility of those events. Complexity and volatility factors considered are as follows:
• Contract complexity;
• Nature and number of perils arising from an event;
• Limits and sub limits exposed;
• Quality, timing and flow of information received from each loss;
• Timing of receipt of information to the Company;
• Information regarding retrocessional covers;
• Assumptions, both explicit and implicit, regarding future paid and reported loss development patterns;
• Frequency and severity trends;
• Claims settlement practices; and
• Potential changes in the legal environment.
Each of these factors may lead to associated volatility for each notable loss event as well as consideration of the total reserve for loss events in the aggregate. Consequently, all of these factors are considered in the aggregate for the events occurring in the quarter, recognizing that it is more likely that one or some of the events may deteriorate significantly, rather than all deteriorating proportionately. The establishment of each quarter’s requirement for a reserve for potential development on notable loss events takes place as part of the quarterly evaluation of the Company’s overall reserve requirements. It is not directly linked in isolation to any one significant/notable loss in the quarter. The reserve for potential development on notable loss events is evaluated by our in-house actuaries as part of their normal process in setting of indicated reserves for the quarter. In ensuing quarters, senior management and the in-house actuaries revisit and re-estimate certain events previously considered in the catastrophe loss event process as well as events that have subsequently emerged in the current quarter. To the extent that there has been adverse development on a notable loss event, if there is RDE remaining from that accident year, an allocation from the respective accident year RDE will be made to the notable loss event. If there is no remaining RDE relating to the accident year of the loss, then adverse development will be recorded for the notable loss event.
Changes to the reserve for potential development on notable loss events will be considered in light of changes to previous loss estimates from notable loss events in this re-estimation process. To the extent that there are continued complexity and volatility factors relating to notable loss events in the aggregate, additions to the RDE may be established for a specific accident year.

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Management’s loss estimates are subject to annual corroborative review by independent external actuaries using generally accepted actuarial techniques and other analytical and qualitative methods.
The Company’s reserving methodology was not changed materially in the year ended December 31, 2017 from the methodology used in the year ended December 31, 2016. Management’s best estimate of the gross reserve for losses and loss expenses and loss reserves recoverable at December 31, 2017 were $4.8 billion and $1.2 billion, respectively. The following table sets forth a breakdown between gross case reserves and gross IBNR by segment at December 31, 2017:
 
 
December 31, 2017
(Dollars in thousands)
 
Gross Case
Reserves
 
Gross IBNR Reserves
 
Total Gross
Reserve for
Losses and
Loss Expenses
Reinsurance Segment
 
$
633,441

 
$
1,183,213

 
$
1,816,654

Insurance Segment
 
839,279

 
1,461,158

 
2,300,437

Asset Management Segment
 
281,124

 
433,175

 
714,299

Total
 
$
1,753,844

 
$
3,077,546

 
$
4,831,390

Management’s best estimate of the gross reserve for losses and loss expenses and loss reserves recoverable at December 31, 2016 were $3.0 billion and $430.4 million, respectively. The following table sets forth a breakdown between gross case reserves and gross IBNR by segment at December 31, 2016:
 
 
December 31, 2016
(Dollars in thousands)
 
Gross Case
Reserves
 
Gross IBNR Reserves
 
Total Gross
Reserve for
Losses and
Loss Expenses
Reinsurance Segment
 
$
497,351

 
$
696,146

 
$
1,193,497

Insurance Segment
 
731,315

 
1,021,849

 
1,753,164

Asset Management Segment
 
9,106

 
39,428

 
48,534

Total
 
$
1,237,772

 
$
1,757,423

 
$
2,995,195

To the extent (re)insurance industry data is relied upon to aid in establishing reserve estimates, there is a risk that the data may not match the Company’s risk profile or that the industry’s reserving practices overall differ from those of the Company and its clients. In addition, reserving can prove especially difficult should a significant loss event take place near the end of an accounting period, particularly if it involves a catastrophic event. These factors further contribute to the degree of uncertainty in the reserving process.
The uncertainties inherent in the reserving process, together with the potential for unforeseen developments, including changes in laws and the prevailing interpretation of policy terms, may result in losses and loss expenses materially different from the reserves initially established. Changes to prior year reserves will affect current period underwriting income by increasing income if the prior year ultimate losses are reduced or decreasing income if the prior year ultimate losses are increased. The Company expects volatility in results in periods when significant loss events occur because U.S. GAAP does not permit insurers or reinsurers to reserve for loss events until they have both occurred and are expected to give rise to a claim. As a result, the Company is not allowed to record contingency reserves to account for expected future losses. The Company anticipates that claims arising from future events will require the establishment of substantial reserves in future periods.
Effect if Actual Results Differ From Assumptions: Given the risks and uncertainties associated with the process for estimating reserves for losses and loss expenses, management has performed an evaluation of the potential variability in loss reserves and the impact this variability may have on reported results, financial condition and liquidity. Because of the inherent uncertainties discussed above, we have developed a reserving philosophy which attempts to incorporate prudent assumptions and estimates, and we have generally experienced favorable net development on prior year reserves in the last several years. However, there is no assurance that this will occur in future periods.
Management’s best estimate of the net reserve for losses and loss expenses at December 31, 2017 is $3.6 billion. The following tables show the effect on estimated net reserves for losses and loss expenses as of December 31, 2017 of a change in two of the most critical assumptions in establishing reserves: (1) loss emergence patterns, accelerated or decelerated by three and six months; and (2) expected loss ratios varied by plus or minus five and ten percent. Management believes that a reasonably likely scenario is represented by such a standard, as used by some professional actuaries as part of their review of an insurer’s or reinsurer’s reserves. Utilizing this standard as a guide, management has selected these variances to determine reasonably likely scenarios of variability in the loss emergence and loss ratio assumptions. These scenarios consider normal levels of catastrophe events. Loss reserves may vary beyond these scenarios in periods of heightened or reduced claim activity. The reserves resulting from the changes in the

107

assumptions are not additive and should be considered separately. The following tables vary the assumptions employed therein independently. In addition, the tables below do not adjust any parameters other than the ones described above. Specifically, reinsurance collectability was not explicitly stressed as part of the calculations below.
Net reserve for losses and loss expenses at December 31, 2017—Sensitivity to loss emergence patterns
 
 
December 31, 2017
(Dollars in thousands)
 
Reserve for losses and loss expenses
Change in assumption
 
 
Six month acceleration
 
$
3,209,064

Three month acceleration
 
$
3,385,769

No change (selected)
 
$
3,597,393

Three month deceleration
 
$
3,813,320

Six month deceleration
 
$
4,007,107

Net reserve for losses and loss expenses at December 31, 2017—Sensitivity to expected loss ratios
 
 
December 31, 2017
(Dollars in thousands)
 
Reserve for losses and loss expenses
Change in assumption
 
 
10% favorable
 
$
3,347,338

5% favorable
 
$
3,472,366

No change (selected)
 
$
3,597,393

5% unfavorable
 
$
3,722,420

10% unfavorable
 
$
3,847,448

The most significant variance in the above scenarios, a six month deceleration in loss emergence patterns, would have the effect of increasing losses and loss expenses by $409.7 million.
Management believes that the reserve for losses and loss expenses are sufficient to cover expected claims incurred before the reporting date on the basis of the methodologies and judgments used to support its estimates. However, there can be no assurance that actual payments will not vary significantly from total reserves. The reserve for losses and loss expenses and the methodology of estimating such reserve are regularly reviewed and updated as new information becomes known. Any resulting adjustments are reflected in income in the period in which they become known.
Premiums 
Description: For insurance business, written premium estimates are determined from the business plan estimates of premiums by class, the aggregate of underwriters’ estimates on a policy-by-policy basis, and projections of ultimate premiums using generally accepted actuarial methods. In particular, direct insurance premiums are recognized in accordance with the type of contract written. The majority of our insurance premium is accepted on a direct open market or facultative (proportional or non-proportional) basis. We receive a premium which is identified in the policy and this premium will typically adjust only if the underlying insured values adjust.
A portion of our insurance business is written on facility (line slip or binder) basis, under which we assume a fixed percentage of the premiums and losses on a particular risk or group of risks along with numerous other unrelated insurers or delegate underwriting authority to a coverholder within set premium limits. Although premiums on this business are not contractually stated, we recognize gross premiums written based on an estimate provided by the client or coverholder, via the broker.
For reinsurance business, where the assumed reinsurance premium is written on an excess of loss (non-proportional) or on a proportional basis, reinsurance contracts are generally written prior to the time the underlying direct policies are written by cedants and accordingly cedants must estimate such premiums when purchasing reinsurance coverage. For excess of loss contracts, the deposit premium is defined in the contract. The deposit premium is based on the client’s estimated premiums, and this estimate is the amount recorded as written premium in the period the risk incepts. In the majority of cases, these contracts are adjustable to reflect the changes in underlying risks during the contract period. For proportional contracts, an estimate of written premium is recorded in the period in which the risk incepts. The written premiums estimate is based on the proportional cession percentage, on information provided by ceding companies and on management’s judgment. Management critically evaluates the information provided by ceding companies based on experience with the cedant, broker and the underlying book of business and may modify the initial premium estimates provided by the cedant.

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The table below identifies the extent of premiums that were written on a proportional and non-proportional basis:
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
(Dollars in thousands)
 
Gross
Premiums Written
 
% of Total
 
Gross
Premiums Written
 
% of Total
 
Gross
Premiums Written
 
% of Total
Proportional
 
$
707,031

 
24.0
%
 
$
767,922

 
29.0
%
 
$
725,135

 
28.4
%
Non-proportional
 
2,243,907

 
76.0
%
 
1,880,783

 
71.0
%
 
1,832,371

 
71.6
%
Total
 
$
2,950,938

 
100.0
%
 
$
2,648,705

 
100.0
%
 
$
2,557,506

 
100.0
%
Premium earning: For contracts written on a losses occurring basis or claims made basis, being the majority of our insurance and excess of loss reinsurance business, premium income is generally earned proportionately over the expected risk period, usually 12 months. For contracts written on a risks attaching basis, being primarily our proportional reinsurance and line slip and binder business, premiums are generally earned over a 24 month period due to the fact that some of the underlying exposures may attach towards the end of the contract, and such underlying exposures generally have a 12 month coverage period. The portion of the premium related to the unexpired portion of the policy at the end of any reporting period is presented on the Consolidated Balance Sheet as unearned premiums. Changes in circumstance subsequent to contract inception can impact the earning period. For example, when the exposure limit for a contract is reached, we fully earn any associated unearned premium.
Judgments and Uncertainties: On a quarterly basis, the Company evaluates the appropriateness of premium estimates based on the latest information available, which may include actual reported premium to date, the latest premium estimates as provided by cedants and brokers, historical experience, management’s professional judgment, underlying values as necessary, information obtained during the underwriting renewal process, as well as an assessment of relevant economic conditions. Past experience may not be indicative of how future premium estimates develop.
For business written on a direct or facultative basis, endorsements, based on reports by our clients of changes in the original contractual cover, are recorded in the period in which the client reports are received, which would normally be over the life of the cover or shortly afterwards. Typically, the adjustment to the original premium is an insignificant portion of the total premium written.
For business written on a binder facility basis, although a premium estimate is not contractually stated for the amount of business to be written under any particular facility, an initial estimate of the expected premium written is received from the coverholder via the broker. Our estimate of premium is derived by reference to one or more of the following: the historical premium volume experienced by any facility, historical premium volume of similar facilities, the estimates provided by the broker and industry information on the underlying business. We actively monitor the development of actual reported premium against the estimates made; where actual reported premiums deviate from the estimate, we carry out an analysis to determine the cause and may, if necessary, adjust the estimated premiums.
For business written on an excess of loss basis, premium adjustments, based on reports by the clients of actual premium, are recorded in the period in which the cedant reports are received, which would normally be within six months to one year subsequent to the expiration of the contract. Typically the adjustment to the deposit premium is an insignificant portion of the total premium written. Many of our excess of loss contracts also include provisions that require an automatic reinstatement of coverage in the event of a loss. Reinstatement premiums are recognized when a triggering loss event occurs and losses are recorded by us. While the reinstatement premium amount is defined by contract terms, our recognition of reinstatement premiums is dependent on our estimate of losses and loss expenses, which reflect management’s best judgment as described above in “Reserve for Losses and Loss Expenses.”
For business written on a proportional basis, we review premium estimates on a quarterly basis and evaluate their reasonability in light of actual reported premium to date, the latest premium estimates as provided by cedants and brokers, historical experience, management’s professional judgment, information obtained during the underwriting renewal process, as well as an assessment of relevant economic conditions. Factors contributing to changes from the initial premium estimates may include changes in renewal rates, rates of new business or underlying exposures. As a result of this review process, any adjustments to estimates are recognized in gross premiums written during the period they are determined. Such changes in premium estimates may directly impact net premiums earned in the period they are determined because the adjustment may need to be substantially or fully earned.
The Company believes that reasonably likely changes in assumptions made in the estimation process would not have a significant impact on gross premiums written as recorded.
Credit risk: Management includes an assessment of the creditworthiness of cedants in the review process above, primarily based on market knowledge, reports from rating agencies, the timeliness of cedants’ payments and the status of current balances owing. Based on this assessment, management believes that as at December 31, 2017 no provision for doubtful accounts is necessary for receivables from cedants.

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Reinsurance Premiums Ceded and Reinsurance Recoverables
Description: As discussed in Item 1 “Business,” the Company primarily uses ceded reinsurance for risk mitigation purposes. Our Reinsurance and Insurance segments primarily purchase reinsurance on an excess of loss and proportional basis. The Company also purchases ILWs and a relatively small amount of facultative reinsurance.
Judgments and Uncertainties: For excess of loss business, the amount of reinsurance premium payable is usually contractually documented at inception and management judgment is only necessary in respect of any loss-related elements of the reinsurance premium, for example, reinstatement or adjustment premiums and loss-related commissions. The full reinsurance premium ceded is recorded at inception and if the contract is purchased on a “losses occurring” basis, the reinsurance premium ceded is expensed on a straight line basis over the life of the contract. If the policy is purchased on a “risks attaching” basis, the reinsurance premium ceded is expensed in line with how the inwards gross premium, to which the risk attaching policy relates, is earned. After the contract has expired, a No Claims Bonus may be received for certain policies, and this is recorded as a reinsurance premium adjustment in the period in which it can be reasonably determined.
Paid losses recoverable and loss reserves recoverable balances include amounts owed to us in respect of paid and unpaid ceded losses and loss expenses, respectively. The balances are presented net of a provision for non-recoverability. As at December 31, 2017, loss reserves recoverable balances were $1.2 billion and paid losses recoverable balances were $46.9 million. In establishing our reinsurance recoverable balances, significant judgment is exercised by management in determining the amount of unpaid losses and loss expenses to be ceded as well as our ability to cede losses and loss expenses under our reinsurance contracts.
The Company’s ceded unpaid losses and loss expenses consists of two elements, those for reported losses and those for IBNR. Ceded amounts for IBNR are developed as part of our loss reserving process. Consequently, the estimation of ceded unpaid losses and loss expenses is subject to similar risks and uncertainties in the estimation of gross IBNR (refer to “Reserve for Losses and Loss Expenses” above). As at December 31, 2017, ceded IBNR recoverable balances were $958.5 million.
Although our reinsurance recoverable balances are derived from our determination of contractual provisions, the recoverability of such amounts may ultimately differ due to the potential for a reinsurer to become financially impaired or insolvent or for a contractual dispute over contract language or coverage. Consequently, we review our reinsurance recoverable balances on a regular basis to determine if there is a need to establish a provision for non-recoverability. In performing this review, the Company uses judgment in assessing the credit worthiness of our reinsurers and the contractual provisions of our reinsurance agreements. As at December 31, 2017, the Company had a provision for non-recoverability of $8.8 million. In the event that the credit worthiness of our reinsurers were to deteriorate, actual uncollectible amounts could be significantly greater than our provision for non-recoverability.
The Company uses a variety of methods to estimate uncollectible reinsurance, with the primary method being a default analysis. The primary components of the default analysis are reinsurance recoverable balances by reinsurer and default factors used to determine the portion of a reinsurer’s balance deemed to be uncollectible. Default factors require considerable judgment and are determined using the current rating, or rating equivalent, of each reinsurer as well as other key considerations and assumptions.
At December 31, 2017, the use of different assumptions within the model could have an effect on the provision for uncollectible reinsurance reflected in the Company’s Consolidated Financial Statements. To the extent the creditworthiness of the Company’s reinsurers was to deteriorate due to an adverse event affecting the reinsurance industry, such as a large number of major catastrophes, actual uncollectible amounts could be significantly greater than the Company’s provision.
Investment Valuation
Description: Consistent with U.S. GAAP, the Company recognizes investments at their fair value in the Consolidated Balance Sheets. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP also established a three level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon whether the inputs to the valuation of an asset or liability are observable or unobservable in the market at the measurement date, with quoted market prices being the highest level (“Level 1”) and unobservable inputs being the lowest level (“Level 3”). Generally, the degree of judgment used in measuring the fair value of financial instruments inversely correlates with the availability of observable inputs. The Company also holds investments which are measured at fair value using the net asset value practical expedient, and in accordance with U.S. GAAP does not classify these investments within the fair value hierarchy.
Judgments and Uncertainties: The Company’s external investment accounting service provider receives prices from independent pricing sources to measure the fair values of a majority of the Company’s investments. These independent pricing sources are prioritized with respect to reliability to ensure that only the highest priority pricing inputs are used. The independent pricing sources are received via automated feeds from indices, pricing and broker-dealers services. Pricing is also obtained from other external investment managers. This information is applied consistently across all portfolios. The Company’s external investment accounting service provider confirms and documents all prices received from broker-dealers on a daily basis for quality control and audit purposes.

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In addition to internal controls, management relies on the effectiveness of the valuation controls in place at the Company’s external investment accounting service provider (supported by a Statement on Standards for Attestation Engagements No. 16 Report) in conjunction with regular discussion and analysis of the investment portfolio’s structure and performance. To date, management has not noted any issues or discrepancies related to investment valuation.
For further details on the valuation of the Company’s investment portfolio refer to Note 8 to the Consolidated Financial Statements, “Fair value measurements,” in Part II, Item 8.
Refer to Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” for further discussion of interest rate risk and a sensitivity analysis of the impact of interest rate variances on the valuation of the Company’s fixed maturity and short-term investments.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price over the fair value of nets assets acquired from the acquisition of Talbot, Western World and CRS. Intangible assets with a finite life are amortized over the estimated useful life of the asset. Intangible assets with an indefinite useful life are not amortized.
Goodwill and intangible assets are assessed for impairment on an annual basis or more frequently if events or changes in circumstances indicate that it is more likely than not that an impairment exists. Such events or circumstances may include an economic downturn in a geographic market or change in the assessment of future operations. In performing this assessment, the Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative goodwill impairment test. Similarly, the Company may first assess qualitative factors to determine whether it is more likely than not that an intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test described in ASC Topic 350 “Intangibles-Goodwill and Other.” The factors assessed in making this determination included the overall insurance industry outlook, business strategy, premium rates, earnings sustainability, market capitalization and the regulatory and political environment.
If goodwill or intangible assets are impaired, they are written down to their fair value with a corresponding expense reflected in the Consolidated Statements of Income and Comprehensive Income in the period in which the determination is made.
As at December 31, 2017 neither the Company’s initial valuation nor its subsequent valuations have indicated any impairment of the Company’s goodwill and intangible assets of $229.6 million and $171.4 million, respectively. For further details refer to Note 6 to the Consolidated Financial Statements, “Goodwill and intangible assets,” in Part II, Item 8.


111

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Any prospectus, prospectus supplement, the Company’s Annual Report to shareholders, any proxy statement, any other Form 10-K, Form 10-Q or Form 8-K of the Company or any other written or oral statements made by or on behalf of the Company may include forward-looking statements that reflect the Company’s current views with respect to future events and financial performance. These projections, goals, assumptions and statements are not historical facts but instead represent only the Company’s belief regarding future events, many of which, by their nature, are inherently uncertain and outside the Company’s control. These projections, goals, assumptions and statements include statements preceded by, followed by or including words such as “will,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “focused on achieving,” “view,” “target,” “goal,” or “estimate.” All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause the Company’s actual results and financial condition to differ, possibly materially, from the results and financial condition indicated in these projections, goals, assumptions and statements and, therefore, you should not place undue reliance on any such statement.
We believe that these factors include, but are not limited to, the following:
•
unpredictability and severity of catastrophic events;
•
our ability to obtain and maintain ratings, which may affect by our ability to raise additional equity or debt financings, as well as other factors described herein;
•
adequacy of the Company’s risk management and loss limitation methods;
•
cyclicality of demand and pricing in the (re)insurance markets;
•
the Company’s ability to implement its business strategy during “soft” as well as “hard” markets;
•
adequacy of the Company’s loss reserves;
•
continued availability of capital and financing;
•
the Company’s ability to identify, hire and retain, on a timely and unimpeded basis and on anticipated economic and other terms, experienced and capable senior management, as well as underwriters, claims professionals and support staff;
•
acceptance of our business strategy, security and financial condition by rating agencies and regulators, as well as by brokers and (re)insureds;
•
competition, including increased competition, on the basis of pricing, capacity, coverage terms or other factors;
•
potential loss of business from one or more major insurance or reinsurance brokers;
•
the Company’s ability to implement, successfully and on a timely basis, complex infrastructure, distribution capabilities, systems, procedures and internal controls, and to develop accurate actuarial data to support the business and regulatory and reporting requirements;
•
general economic and market conditions (including inflation, volatility in the credit and capital markets, interest rates and foreign currency exchange rates) and conditions specific to the (re)insurance markets in which we operate;
•
the integration of businesses we may acquire or new business ventures, including overseas offices, we may start and the risk associated with implementing our business strategies and initiatives with respect to the new business ventures;
•
accuracy of those estimates and judgments used in the preparation of our financial statements, including those related to revenue recognition, insurance and other reserves, reinsurance recoverables, investment valuations, intangible assets, bad debts, taxes, contingencies, litigation and any determination to use the deposit method of accounting, which, for a relatively new (re)insurance company like our company, are even more difficult to make than those made in a mature company because of limited historical information;
•
the effect on the Company’s investment portfolio of changing financial market conditions including inflation, interest rates, liquidity and other factors;
•
acts of terrorism, political unrest, outbreak of war and other hostilities or other non-forecasted and unpredictable events;
•
availability and cost of reinsurance and retrocession coverage;
•
the failure of reinsurers, retrocessionaires, producers or others to meet their obligations to us;

112

•
the timing of loss payments being faster or the receipt of reinsurance recoverables being slower than anticipated by us;
•
changes in domestic or foreign laws or regulations, or their interpretations;
•
changes in accounting principles or the application of such principles by regulators;
•
statutory or regulatory or rating agency developments, including as to tax policy and reinsurance and other regulatory matters such as the adoption of proposed legislation that would affect Bermuda-headquartered companies and/or Bermuda based insurers or reinsurers;
•
termination of or changes in the terms of the U.S. MPCI program and termination or changes to the U.S. Farm Bill, including modifications to the SRA put in place by the Risk Management Agency of the U.S. Department of Agriculture;
•
the inability to complete the proposed transaction with AIG (the “proposed transaction”) because, among other reasons, conditions to the closing of the proposed transaction may not be satisfied or waived;
•
uncertainty as to the timing of completion of the proposed transaction;
•
the inability to complete the proposed transaction due to the failure to obtain approval from the Company’s shareholders for the proposed transaction or the failure to satisfy other conditions to completion of the proposed transaction, including that a governmental entity may prohibit, delay or refuse to grant approval for the consummation of the transaction;
•
the occurrence of any event, change or other circumstances that could give rise to the termination of the proposed transaction;
•
risks related to disruption of management’s attention from the Company’s ongoing business operations due to the proposed transaction;
•
the effect of the announcement of the proposed transaction on the Company’s relationships with its clients, operating results and business generally;
•
the outcome of any legal proceedings to the extent initiated against the Company or others following the announcement of the proposed transaction; and
•
the other factors set forth herein under Part I Item 1A “Risk Factors” and under Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other sections of this Annual Report on Form 10-K for the year ended December 31, 2017, as well as the risk and other factors set forth in the Company’s other filings with the SEC, as well as management’s response to any of the aforementioned factors.
In addition, other general factors could affect our results, including: (a) developments in the world’s financial and capital markets and our access to such markets; (b) changes in regulations or tax laws applicable to us, and (c) the effects of business disruption or economic contraction due to terrorism or other hostilities.
The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included herein or elsewhere. Any forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us or our business or operations. Except as required by law, we undertake no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

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Item 7A.    Quantitative And Qualitative Disclosures About Market Risk
The Company is principally exposed to five types of market risk:
•
interest rate risk;
•
foreign currency risk;
•
credit risk;
•
liquidity risk; and
•
inflation risk.
Interest Rate Risk   
 The Company’s managed fixed maturity and short-term investments are exposed to interest rate risk. Fluctuations in interest rates have a direct impact on the market valuation of these investments. As interest rates rise and credit spreads widen, the market value of the Company’s fixed maturity and short-term investments fall and the Company has the risk that cash outflows will have to be funded by selling assets, which will be trading at depreciated values. As interest rates decline and credit spreads tighten, the market value of the Company’s fixed maturity and short-term investments increase and the Company has reinvestment risk, as funds reinvested may earn less than is necessary to match anticipated liabilities. The Company manages interest rate risk by selecting investments with characteristics such as duration, yield, currency and liquidity tailored to the anticipated cash outflow characteristics of the (re)insurance liabilities it assumes and through the use of derivative instruments.
The following table indicates the impact on the fair value of the Company’s managed fixed maturity and short-term investment portfolios from an immediate 100 basis point increase and decrease in market interest rates (based on U.S. treasury yields):
 
 
December 31, 2017
 
December 31, 2016
(Dollars in thousands)
 
Increase (decrease) in fair value
 
Increase (decrease) in fair value
Immediate 100 basis point increase in market interest rates
 
$
(132,008
)
 
(2.1
)%
 
$
(136,758
)
 
(2.4
)%
Immediate 100 basis point decrease in market interest rates
 
$
129,981

 
2.0
 %
 
$
137,213

 
2.4
 %
As at December 31, 2017, the Company held $2.0 billion (December 31, 2016: $1.6 billion), or 35.3% (December 31, 2016: 28.8%) of the Company’s managed fixed maturity investments in asset-backed and mortgage-backed securities. Some of these assets are exposed to prepayment risk, which occurs when the frequency with which holders of the underlying loans prepay the outstanding principal before the maturity date changes. The adverse impact of prepayment is more evident in a declining interest rate environment. As a result, the Company will be exposed to reinvestment risk, as cash flows received by the Company will be accelerated and will be reinvested at the prevailing interest rates.
Foreign Currency Risk    
We conduct our (re)insurance operations in a variety of non-U.S. currencies and certain of the Company’s reinsurance contracts provide that ultimate losses may be payable in foreign currencies depending on the country of original loss. As the functional currency for the majority of our subsidiaries is the U.S. dollar, foreign currency exchange rate risk exists to the extent that there is an increase in the exchange rate of the foreign currency in which losses are ultimately owed. Therefore, our foreign currency policy is to broadly manage, where possible, our foreign currency risk by seeking to match our liabilities under (re)insurance policies that are payable in foreign currencies with assets that are denominated in such currencies.
The following table presents the Company’s monetary assets and liabilities held in foreign currencies and the Company’s non-monetary assets and liabilities that do not require revaluation:
 
 
December 31, 2017
 
December 31, 2016
(Dollars in thousands)
 
Balance
 
% of Total
 
Balance
 
% of Total
Total monetary assets held in foreign currencies
 
$
703,183

 
4.9
%
 
$
592,010

 
5.2
%
Total monetary liabilities held in foreign currencies
 
686,088

 
7.2
%
 
681,281

 
11.7
%
Total non-monetary assets that do not require revaluation
 
12,703

 
0.1
%
 
16,584

 
0.1
%
Total non-monetary liabilities that do not require revaluation
 
57,703

 
0.6
%
 
87,291

 
1.5
%
When necessary, the Company may also use forward contracts to manage unmatched foreign currency exposures. To the extent foreign currency exposures are not hedged or otherwise matched, the Company may experience foreign exchange gains or losses, which in turn would affect the Company’s results of operations and financial condition.

114

For further information on the Company’s derivatives, refer to Note 3(g) to the Consolidated Financial Statements, “Significant Accounting Policies - Derivative instruments,” and Note 11 to the Consolidated Financial Statements, “Derivative instruments,” in Part II, Item 8.
Credit Risk    
Credit risk relates to the uncertainty of a counterparty’s ability to make timely payments in accordance with contractual terms of the instrument or contract. We are exposed to direct credit risk primarily within our portfolios of fixed maturity and short-term investments, and through customers, brokers and reinsurers in the form of premiums receivable and reinsurance recoverables, respectively, as discussed below.
The Company is exposed to credit risk from the possibility that counterparties may default on their obligations. The Company’s primary credit risks reside in investments in U.S. and non-U.S. corporate bonds and loans and amounts recoverable from reinsurers.
Investments: The Company attempts to limit its credit exposure by purchasing high quality fixed maturity investments to maintain a minimum weighted average portfolio credit rating of A+ on its rated managed fixed maturity investments. As at December 31, 2017, the Company’s rated managed fixed maturity investments had an average credit quality rating of AA- (December 31, 2016: AA-).
In addition, the Company’s IPS limits the amount of “risk assets” held as part of its managed cash and investments portfolio to a maximum of 35% of shareholders’ equity available to Validus. Risk assets include non-investment grade debt securities, private equity investments, private placements that are not subject to rule 144A, hedge funds and other alternative assets. The Company’s managed cash and investment portfolio had risk assets of $760.3 million or 19.5% of shareholders’ equity available to Validus as at December 31, 2017 (December 31, 2016: $853.0 million or 22.2%).
The Company also limits its aggregate exposure to any single issuer to 3.75% or less of its total managed cash and investments portfolio, excluding government and agency securities, depending on the credit rating of the issuer. The Company did not have an aggregate exposure to any single issuer of more than 0.9% of total managed cash and investments, other than with respect to government and agency securities as at December 31, 2017 (December 31, 2016: 1.0%).
Furthermore, fixed maturity investments in below investment grade securities are limited to no more than 15% of the Company’s managed cash and investments portfolio. As at December 31, 2017, 7.1% (December 31, 2016: 9.4%) of the managed cash and investment portfolio was rated below Baa3/BBB-.
Reinsurance: The amount of the maximum exposure to credit risk is indicated by the carrying value of the Company’s financial assets. The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from its exposure to individual reinsurers. The reinsurance program is generally placed with reinsurers whose rating, at the time of placement, was A- or better rated by S&P or the equivalent with other rating agencies. Exposure to a single reinsurer is also controlled with restrictions dependent on rating. As at December 31, 2017, $1.3 billion or 99.2% (December 31, 2016: $461.4 million or 99.1%) of the Company’s reinsurance balances recoverable were either fully collateralized or recoverable from reinsurers rated A- or better.
Liquidity risk    
Certain of the Company’s investments may become illiquid. Disruption in the credit markets may materially affect the liquidity of the Company’s investments, including non-agency residential mortgage-backed securities and bank loans which represent 6.8% at December 31, 2017 (December 31, 2016: 8.9%) of managed cash and investments. If the Company requires significant amounts of cash on short notice in excess of normal cash requirements (which could include claims on a major catastrophic event) in a period of market illiquidity, the investments may be difficult to sell in a timely manner and may have to be disposed of for less than what may otherwise have been possible under other conditions. At December 31, 2017, the Company had $1.0 billion (December 31, 2016: $726.0 million) of unrestricted, liquid assets, defined as managed unpledged cash and cash equivalents, short term investments, government and government agency securities.
For details on the Company’s debt and financing arrangements, refer to Part II, Item 8, Note 19 to the Consolidated Financial Statements, “Debt and financing arrangements.”
Inflation Risk    
The Company does not believe that inflation has had or will have a material effect on its combined results of operations, except insofar as (a) inflation may affect interest rates, and (b) losses and loss expenses may be affected by inflation.

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Item 8.    Financial Statements and Supplementary Data
Reference is made to Item 15 (a) of this Report for the Consolidated Financial Statements of Validus Holdings, Ltd. and the Notes thereto, as well as the Schedules to the Consolidated Financial Statements.
Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.    Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of disclosure controls and procedures as defined and in pursuant to Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report.
Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to provide reasonable assurance that all material information relating to the Company required to be filed in this report has been recorded, processed, summarized and reported when required and the information is accumulated and communicated, as appropriate, to allow timely decisions regarding required disclosures.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013).
On May 1, 2017, the Company acquired all of the outstanding capital stock of CRS. CRS’ total assets and total revenues represented approximately 4.7% and 8.5%, respectively of the Company’s total assets and total revenues as of and for the year ended December 31, 2017. As permitted under SEC guidance, the Company has excluded CRS from the Company’s assessment scope for the effectiveness of internal control over financial reporting as of December 31, 2017 because it was acquired by the Company in a purchase business combination during 2017.
Based on its assessment, management concluded that, as of December 31, 2017, the Company’s internal control over financial reporting was effective. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2017 has been audited by PricewaterhouseCoopers Ltd., an independent registered public accounting firm, as stated in their report included in this filing.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting identified in connection with the Company’s evaluation required pursuant to Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934, as amended, that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

116

Item 9B.    Other Information
Disclosure of Certain Activities Under Section 13(r) of the Securities Exchange Act of 1934
Section 13(r) of the Securities Exchange Act of 1934, as amended, requires an issuer to disclose in its annual or quarterly reports whether it or an affiliate knowingly engaged in certain activities described in that section, including certain activities related to Iran during the period covered by the report.
Effective January 16, 2016, the Office of Foreign Assets Control of the U.S. Department of the Treasury adopted General License H which authorizes non-U.S. entities that are owned or controlled by a U.S. person to engage in certain activities with Iran so long as they comply with certain specific requirements set forth therein.
Certain of the Company’s non-U.S. subsidiaries provide global marine hull, war, cargo and liability policies that provide coverage for vessels navigating into and out of ports worldwide. In light of EU and U.S. modifications to Iran sanctions in 2016, including the issuance of General License H, and consistent with General License H, the Company has been notified that certain of its policyholders have begun to ship cargo to and from Iran, including transporting crude oil from Iran to another country and transporting refined petroleum products to Iran. Since these policies insure multiple voyages and fleets containing multiple ships, the Company is unable to attribute gross revenues and net profits from such marine policies to these activities involving Iran. The Company intends for its non-U.S. subsidiaries to continue to provide such coverage to the extent permitted by applicable law.
Certain of the Company’s other non-U.S. subsidiaries have policies that provide excess of loss reinsurance coverage for various risks worldwide. In light of EU and U.S. modifications to Iran sanctions in 2016, including the issuance of General License H, and consistent with General License H, the Company has been notified by certain of its cedants that they either provide or intend to provide aviation spare parts coverage or marine and hull, war and related coverage for certain risks involving Iran. As the reinsurance coverage provided to these cedants covers multiple global risks and multiple insureds, the Company is unable to attribute gross revenues and net profits from such policy to these activities involving Iran. The Company intends for its non-U.S. subsidiaries to continue to provide such coverage to the extent permitted by applicable law.



117

PART III

Item 10.    Directors, Executive Officers and Corporate Governance
Certain of the information required by this item relating to the executive officers of the Company may be found in Part I, Item 1, “Business.” The balance of the information required by this item is omitted because a definitive proxy statement that involves the election of directors will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is incorporated herein by reference.
Item 11.    Executive Compensation
This item is omitted because a definitive proxy statement that involves the election of directors will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is incorporated herein by reference.
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Equity Compensation Plan Information
The following table displays certain information regarding our equity compensation plans at December 31, 2017:
(Dollars in thousands)
 
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a)
 
Weighted-Average
Exercise Price of
Outstanding Options, Warrants and Rights (b)
 
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans (excluding securities reflected in column (a)) (c)
2005 Amended and Restated Long-Term Incentive Plan
 
109,394

 
$
—

 
702,305

Director Stock Compensation Plan
 
—

 
 
 
52,104

(a)
Includes shares subject to outstanding restricted stock units only. All outstanding options were exercised in full during 2017.
(b)
Restricted stock units do not have an exercise price.
The balance of the information required by this item is omitted because a definitive proxy statement that involves the election of directors will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is incorporated herein by reference.
Item 13.    Certain Relationships and Related Transactions, and Director Independence
This item is omitted because a definitive proxy statement that involves the election of directors will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is incorporated herein by reference.
Item 14.    Principal Accounting Fees and Services
This item is omitted because a definitive proxy statement that involves the election of directors will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is incorporated herein by reference.


118

PART IV

Item 15.    Exhibits and Financial Statement Schedules
Financial Statements, Financial Statement Schedules and Exhibits.
(a)
Financial Statements and Financial Statement Schedules: See pages F-1 to F-97.
(b)
The exhibits numbers followed by an asterisk (*) indicate exhibits physically filed with this Annual Report on Form 10-K. All other exhibit numbers indicate exhibits filed by incorporation by reference.
Exhibit Number
 
Description of Document
2.1
 
 
 
 
3.1
 
 
 
 
3.2
 
 
 
 
4.1
 
 
 
 
4.2
 
 
 
 
4.3
 
 
 
 
4.4
 
 
 
 
4.5
 
 
 
 
4.6
 
 
 
 
4.7
 
 
 
 
4.8
 
 
 
 
4.9
 
 
 
 
4.10
 
 
 
 
4.11
 
 
 
 
4.12
 
 
 
 
4.13
 
 
 
 
4.14
 
 
 
 
4.15
 
 
 
 

119

4.16
 
 
 
 
4.17
 
 
 
 
4.18
 
 
 
 
4.19
 
 
 
 
4.20
 
 
 
 
4.21
 
 
 
 
4.22
 
 
 
 
4.23
 
 
 
 
4.24
 
 
 
 
4.25
 
 
 
 
4.26
 
 
 
 
4.27
 
 
 
 
4.28
 
 
 
 
4.29
 
 
 
 
4.30
 
 
 
 
4.31
 
 
 
 

120

4.32
 
 
 
 
4.33
 
 
 
 
10.1
 
 
 
 
10.2
 
 
 
 
10.3
 
 
 
 
10.3.1
 
 
 
 
10.4
 
 
 
 
10.4.1
 
 
 
 
10.5
 
 
 
 
10.5.1
 
 
 
 
10.5.2
 
 
 
 
10.6
 
 
 
 
10.6.1
 
 
 
 
10.6.2
 
 
 
 
10.6.3
 
 
 
 
10.7
 
 
 
 
10.8
 
 
 
 
10.8.1
 

121

 
 
 
10.8.2
 
 
 
 
10.9
 
 
 
 
10.9.1
 
 
 
 
10.10
 
 
 
 
10.10.1
 
 
 
 
10.11
 
 
 
 
10.11.1
 
 
 
 
10.11.2
 
 
 
 
10.12
 
 
 
 
10.12.1
 
 
 
 
10.13
 
 
 
 
10.14
 
 
 
 
10.15
 
 
 
 
10.16
 
 
 
 
10.17
 
 
 
 
10.18
 
 
 
 
10.19
 
 
 
 
10.20
 
 
 
 

122

10.21
 
 
 
 
10.22
 
 
 
 
10.23
 
 
 
 
10.24
 
 
 
 
10.25
 
 
 
 
10.26
 
 
 
 
10.27
 
 
 
 
10.28
 
 
 
 
10.29
 
 
 
 
10.30
 
 
 
 
10.31
*
 
 
 
10.32
*
 
 
 
12
*
 
 
 
21
*
 
 
 
23
*
 
 
 
24
 
 
 
 
31.1
*
 
 
 
31.2
*
 
 
 
32
*
 
 
 
101.INS
*
XBRL Instance Document
 
 
 
101.SCH
*
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
*
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.LAB
*
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
*
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
101.DEF
*
XBRL Taxonomy Extension Definition Linkbase Document
*Filed herewith

123

Item 16.    Form 10-K Summary
None.

124

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in Pembroke, Bermuda, on February 28, 2018.
 
Validus Holdings, Ltd.
 
 
 
 
By:
/s/ EDWARD J. NOONAN
 
 
Name:
Edward J. Noonan
 
 
Title:
Chief Executive Officer
 
 
 
 
 
By:
/s/ JEFFREY D. SANGSTER
 
 
Name:
Jeffrey D. Sangster
 
 
Title:
Executive Vice President and Chief Financial Officer

125

POWER OF ATTORNEY
We, the undersigned directors and executive officers of Validus Holdings, Ltd. hereby severally constitute Edward J. Noonan and Jeffrey D. Sangster, and each of them singly, our true and lawful attorneys with full power to them and each of them to sign for us, and in our names in the capacities indicated below, any and all amendments to the Annual Report on Form 10-K filed with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys to any and all amendments to said Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
 
Title
 
Date
 
 
 
 
 
/s/ EDWARD J. NOONAN
 
Chairman of the Board of Directors
 
February 28, 2018
Name: Edward J. Noonan
 
and Chief Executive Officer
(Principal Executive Officer)
 
 
/s/ JEFFREY D. SANGSTER
 
Executive Vice President
 
February 28, 2018
Name: Jeffrey D. Sangster
 
and Chief Financial Officer
(Principal Finance Officer)
 
 
/s/ PATRICK BOISVERT
 
Executive Vice President
 
February 28, 2018
Name: Patrick Boisvert
 
and Chief Accounting Officer
(Principal Accounting Officer)
 
 
/s/ MAHMOUD ABDALLAH
 
Director
 
February 28, 2018
Name: Mahmoud Abdallah
 
 
 
 
/s/ MICHAEL E. A. CARPENTER
 
Director
 
February 28, 2018
Name: Michael E. A. Carpenter
 
 
 
 
/s/ MATTHEW J. GRAYSON
 
Director
 
February 28, 2018
Name: Matthew J. Grayson
 
 
 
 
/s/ KARIN HIRTLER-GARVEY
 
Director
 
February 28, 2018
Name: Karin Hirtler-Garvey
 
 
 
 
/s/ JOHN J. HENDRICKSON
 
Director
 
February 28, 2018
Name: John J. Hendrickson
 
 
 
 
/s/ JEAN-MARIE NESSI
 
Director
 
February 28, 2018
Name: Jean-Marie Nessi
 
 
 
 
/s/ MANDAKINI PURI
 
Director
 
February 28, 2018
Name: Mandakini Puri
 
 
 
 
/s/ GAIL ROSS
 
Director
 
February 28, 2018
Name: Gail Ross
 
 
 
 
/s/ DR. THERESE M. (TERRI) VAUGHAN
 
Director
 
February 28, 2018
Name: Dr. Therese M. (Terri) Vaughan
 
 
 
 

126

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
 
Page No.
Consolidated Financial Statements:
 
 
 
Financial Statement Schedules:
 
Schedules other than those listed are omitted for the reason that they are not required, are not applicable or that equivalent information has been included in the financial statements, notes thereto, or elsewhere herein.

127

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of
Validus Holdings, Ltd.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the consolidated financial statements, including the related notes and financial statement schedules, of Validus Holdings, Ltd. and its subsidiaries as listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded Crop Risk Services Inc. (“CRS”) from its assessment of internal control over financial reporting as of December 31, 2017 because it was acquired by the Company in a purchase business combination during 2017. We have also excluded CRS from our audit of internal control over financial reporting. CRS is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 4.7% and 8.5%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2017.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers Ltd.
Hamilton, Bermuda
February 28, 2018
We have served as the Company’s auditor since 2005.

128

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

Validus Holdings, Ltd.
Consolidated Balance Sheets
As at December 31, 2017 and 2016
(Expressed in thousands of U.S. dollars, except share and per share information)
 
December 31,
2017
 
December 31,
2016
Assets
 
 
 
Fixed maturity investments trading, at fair value (amortized cost: 2017—$5,876,261; 2016—$5,584,599)
$
5,858,348

 
$
5,543,030

Short-term investments trading, at fair value (amortized cost: 2017—$3,381,714; 2016—$2,796,358)
3,381,757

 
2,796,170

Other investments, at fair value (cost: 2017—$330,416; 2016—$380,130)
355,218

 
405,712

Investments in investment affiliates, equity method (cost: 2017—$61,944; 2016—$84,840)
100,137

 
100,431

Cash and cash equivalents
754,990

 
419,976

Restricted cash
394,663

 
70,956

Total investments and cash
10,845,113

 
9,336,275

Premiums receivable
939,487

 
725,390

Deferred acquisition costs
213,816

 
209,227

Prepaid reinsurance premiums
132,938

 
77,996

Securities lending collateral
2,717

 
9,779

Loss reserves recoverable
1,233,997

 
430,421

Paid losses recoverable
46,873

 
35,247

Income taxes recoverable
9,044

 
4,870

Deferred tax asset
52,467

 
43,529

Receivable for investments sold
12,182

 
3,901

Intangible assets
171,411

 
115,592

Goodwill
229,573

 
196,758

Accrued investment income
29,096

 
26,488

Other assets
508,165

 
134,282

Total assets
$
14,426,879

 
$
11,349,755

Liabilities
 

 
 

Reserve for losses and loss expenses
$
4,831,390

 
$
2,995,195

Unearned premiums
1,147,186

 
1,076,049

Reinsurance balances payable
331,645

 
54,781

Securities lending payable
2,717

 
10,245

Deferred tax liability
4,600

 
3,331

Payable for investments purchased
74,496

 
29,447

Accounts payable and accrued expenses
1,225,875

 
587,648

Notes payable to AlphaCat investors
1,108,364

 
278,202

Senior notes payable
245,564

 
245,362

Debentures payable
539,158

 
537,226

Total liabilities
9,510,995

 
5,817,486

Commitments and contingent liabilities


 


Redeemable noncontrolling interests
1,004,094

 
1,528,001

Shareholders’ equity
 
 
 
Preferred shares (Issued and Outstanding: 2017—16,000; 2016—6,000)
400,000

 
150,000

Common shares (Issued: 2017—161,994,491; 2016—161,279,976; Outstanding: 2017—79,319,550; 2016—79,132,252)
28,349

 
28,224

Treasury shares (2017—82,674,941; 2016—82,147,724)
(14,468
)
 
(14,376
)
Additional paid-in capital
814,641

 
821,023

Accumulated other comprehensive loss
(22,192
)
 
(23,216
)
Retained earnings
2,688,742

 
2,876,636

Total shareholders’ equity available to Validus
3,895,072

 
3,838,291

Noncontrolling interests
16,718

 
165,977

Total shareholders’ equity
3,911,790

 
4,004,268

Total liabilities, noncontrolling interests and shareholders’ equity
$
14,426,879

 
$
11,349,755


The accompanying notes are an integral part of these Consolidated Financial Statements.

F-1

Validus Holdings, Ltd.
Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income
For the Years Ended December 31, 2017, 2016 and 2015
(Expressed in thousands of U.S. dollars, except share and per share information)
 
December 31,
2017
 
December 31,
2016
 
December 31,
2015
Revenues
 
 
 
 
 
Gross premiums written
$
2,950,938

 
$
2,648,705

 
$
2,557,506

Reinsurance premiums ceded
(469,633
)
 
(289,705
)
 
(328,681
)
Net premiums written
2,481,305

 
2,359,000

 
2,228,825

Change in unearned premiums
99,783

 
(109,835
)
 
18,064

Net premiums earned
2,581,088

 
2,249,165

 
2,246,889

Net investment income
177,873

 
150,385

 
127,824

Net realized gains on investments
7,623

 
15,757

 
2,298

Change in net unrealized gains (losses) on investments
3,215

 
16,871

 
(32,395
)
Income (loss) from investment affiliates
22,010

 
(2,083
)
 
4,281

Other insurance related income and other income
13,179

 
2,195

 
5,111

Foreign exchange (losses) gains
(7,447
)
 
10,864

 
(8,731
)
Total revenues
2,797,541

 
2,443,154

 
2,345,277

Expenses
 
 
 
 
 
Losses and loss expenses
2,300,178

 
1,065,097

 
977,833

Policy acquisition costs
471,553

 
449,482

 
410,058

General and administrative expenses
352,137

 
336,294

 
363,709

Share compensation expenses
40,111

 
42,907

 
38,341

Finance expenses
58,546

 
58,520

 
74,742

Transaction expenses
4,427

 
—

 
—

Total expenses
3,226,952

 
1,952,300

 
1,864,683

(Loss) income before taxes, (loss) from operating affiliate and loss (income) attributable to AlphaCat investors
(429,411
)
 
490,854

 
480,594

Tax benefit (expense)
7,580

 
19,729

 
(6,376
)
(Loss) from operating affiliate
—

 
(23
)
 
(3,949
)
Loss (income) attributable to AlphaCat investors
16,929

 
(23,358
)
 
(2,412
)
Net (loss) income
(404,902
)
 
487,202

 
467,857

Net loss (income) attributable to noncontrolling interests
357,280

 
(123,363
)
 
(92,964
)
Net (loss) income (attributable) available to Validus
(47,622
)
 
363,839

 
374,893

Dividends on preferred shares
(15,861
)
 
(4,455
)
 
—

Net (loss) income (attributable) available to Validus common shareholders
$
(63,483
)
 
$
359,384

 
$
374,893

 
 
 
 
 
 
Comprehensive (loss) income:
 
 
 
 
 
Net (loss) income
$
(404,902
)
 
$
487,202

 
$
467,857

Other comprehensive income (loss), net of tax:
 
 
 
 
 
Change in foreign currency translation adjustments
4,057

 
(10,440
)
 
(3,716
)
Change in minimum pension liability
2,869

 
(484
)
 
544

Change in fair value of cash flow hedges
(6,352
)
 
277

 
(841
)
Other comprehensive income (loss), net of tax
574

 
(10,647
)
 
(4,013
)
Comprehensive loss (income) attributable to noncontrolling interests
357,280

 
(123,363
)
 
(92,964
)
Comprehensive (loss) income (attributable) available to Validus
$
(47,048
)
 
$
353,192

 
$
370,880

 
 
 
 
 
 
(Loss) earnings per common share
 
 
 
 
 
Basic (loss) earnings per share (attributable) available to Validus common shareholders
$
(0.80
)
 
$
4.43

 
$
4.47

(Loss) earnings per diluted share (attributable) available to Validus common shareholders
$
(0.80
)
 
$
4.36

 
$
4.34

Cash dividends declared per common share
$
1.52

 
$
1.40

 
$
1.28

 
 
 
 
 
 
Weighted average number of common shares and common share equivalents outstanding:
 
 
 
 
Basic
79,091,376

 
81,041,974

 
83,107,236

Diluted
79,091,376

 
82,359,460

 
86,426,760

The accompanying notes are an integral part of these Consolidated Financial Statements.

F-2

Validus Holdings, Ltd.
Consolidated Statements of Shareholders’ Equity
For the Years Ended December 31, 2017, 2016 and 2015
(Expressed in thousands of U.S. dollars)
 
December 31, 2017
 
December 31, 2016
 
December 31, 2015
Preferred shares
 
 
 
 
 
Balance, beginning of year
$
150,000

 
$
—

 
$
—

Preferred shares issued
250,000

 
150,000

 
—

Balance, end of year
$
400,000

 
$
150,000

 
$
—

 
 
 
 
 
 
Common shares
 
 
 
 
 
Balance, beginning of year
$
28,224

 
$
28,100

 
$
27,222

Common shares issued, net
125

 
124

 
878

Balance, end of year
$
28,349

 
$
28,224

 
$
28,100

 
 
 
 
 
 
Treasury shares
 
 
 
 
 
Balance, beginning of year
$
(14,376
)
 
$
(13,592
)
 
$
(12,545
)
Repurchase of common shares
(92
)
 
(784
)
 
(1,047
)
Balance, end of year
$
(14,468
)
 
$
(14,376
)
 
$
(13,592
)
 
 
 
 
 
 
Additional paid-in capital
 
 
 
 
 
Balance, beginning of year
$
821,023

 
$
1,002,980

 
$
1,207,493

Offering expenses on preferred shares
(8,314
)
 
(5,148
)
 
—

Common shares (redeemed) issued, net
(11,703
)
 
(7,825
)
 
16,529

Repurchase of common shares
(26,476
)
 
(211,891
)
 
(259,383
)
Share compensation expenses
40,111

 
42,907

 
38,341

Balance, end of year
$
814,641

 
$
821,023

 
$
1,002,980

 
 
 
 
 
 
Accumulated other comprehensive loss
 
 
 
 
 
Balance, beginning of year
$
(23,216
)
 
$
(12,569
)
 
$
(8,556
)
Other comprehensive income (loss)
574

 
(10,647
)
 
(4,013
)
Amounts reclassified from accumulated other comprehensive loss
450

 
—

 
—

Balance, end of year
$
(22,192
)
 
$
(23,216
)
 
$
(12,569
)
 
 
 
 
 
 
Retained earnings
 
 
 
 
 
Balance, beginning of year
$
2,876,636

 
$
2,634,056

 
$
2,372,972

Net (loss) income
(404,902
)
 
487,202

 
467,857

Net loss (income) attributable to noncontrolling interests
357,280

 
(123,363
)
 
(92,964
)
Dividends on preferred shares
(15,861
)
 
(4,455
)
 
—

Dividends on common shares
(124,411
)
 
(116,804
)
 
(113,809
)
Balance, end of year
$
2,688,742

 
$
2,876,636

 
$
2,634,056

 
 
 
 
 
 
Total shareholders’ equity available to Validus
$
3,895,072

 
$
3,838,291

 
$
3,638,975

Noncontrolling interests
16,718

 
165,977

 
154,662

Total shareholders’ equity
$
3,911,790

 
$
4,004,268

 
$
3,793,637

The accompanying notes are an integral part of these Consolidated Financial Statements.

F-3

Validus Holdings, Ltd.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2017, 2016 and 2015
(Expressed in thousands of U.S. dollars)
 
December 31, 2017
 
December 31, 2016
 
December 31, 2015
Cash flows provided by (used in) operating activities
 
 
 
 
 
Net (loss) income
$
(404,902
)
 
$
487,202

 
$
467,857

Adjustments to reconcile net (loss) income to cash provided by (used in) operating activities:
 
 
 
 
 
Share compensation expenses
40,111

 
42,907

 
38,341

Loss on redemption of AlphaCat ILS fund
402

 
—

 
—

Amortization of discount on Senior Notes
108

 
108

 
108

(Income) loss from investment and operating affiliates
(22,010
)
 
2,106

 
(332
)
Net realized and change in net unrealized (gains) losses on investments
(10,838
)
 
(32,628
)
 
30,097

Amortization of intangible assets
8,261

 
5,666

 
5,666

Foreign exchange (gains) losses included in net income
(14,719
)
 
3,043

 
18,907

Amortization of premium on fixed maturity investments
15,910

 
17,961

 
23,075

Change in operational balance sheet items:
 
 
 
 
 
Premiums receivable
353,787

 
(76,659
)
 
44,154

Deferred acquisition costs
(8,705
)
 
(28,225
)
 
(19,980
)
Prepaid reinsurance premiums
172,215

 
(4
)
 
4,955

Loss reserves recoverable
(745,979
)
 
(85,264
)
 
24,659

Paid losses recoverable
6,352

 
(11,932
)
 
15,111

Reserve for losses and loss expenses
1,717,794

 
37,042

 
(231,345
)
Unearned premiums
(335,512
)
 
109,839

 
(23,019
)
Reinsurance balances payable
(18,381
)
 
(18,487
)
 
(52,785
)
Other operational balance sheet items, net
(364,160
)
 
(42,472
)
 
(10,963
)
Net cash provided by operating activities
389,734

 
410,203

 
334,506

 
 
 
 
 
 
Cash flows provided by (used in) investing activities
 
 
 
 
 
Proceeds on sales of fixed maturity investments
3,135,835

 
2,671,226

 
3,842,408

Proceeds on maturities of fixed maturity investments
482,006

 
349,722

 
332,410

Purchases of fixed maturity investments
(3,850,224
)
 
(3,074,703
)
 
(4,225,031
)
Purchases of short-term investments, net
(577,391
)
 
(856,021
)
 
(436,690
)
Purchases of other investments, net
(7,093
)
 
(64,943
)
 
(5,988
)
Decrease (increase) in securities lending collateral
7,062

 
(4,916
)
 
(4,393
)
Distributions from operating affiliates
—

 
369

 
46,603

Distributions (investments) in investment affiliates, net
22,304

 
(14,841
)
 
(19,886
)
Purchase of subsidiary, net of cash
(183,923
)
 
—

 
—

Net cash used in investing activities
(971,424
)
 
(994,107
)
 
(470,567
)
 
 
 
 
 
 
Cash flows provided by (used in) financing activities
 
 
 
 
 
Net proceeds on issuance of notes payable to AlphaCat investors
311,054

 
296,325

 
75,493

Proceeds drawn on credit facilities
206,000

 
—

 
—

Net proceeds on issuance of preferred shares
241,686

 
144,852

 
—

(Redemption) issuance of common shares, net
(11,578
)
 
(7,701
)
 
17,407

Purchases of common shares under share repurchase program
(26,568
)
 
(212,675
)
 
(260,430
)
Dividends paid on preferred shares
(15,861
)
 
(4,455
)
 
—

Dividends paid on common shares
(123,859
)
 
(115,625
)
 
(112,967
)
(Decrease) increase in securities lending payable
(7,528
)
 
4,916

 
4,393

Third party investments in redeemable noncontrolling interests
397,199

 
393,450

 
499,200

Third party redemptions of redeemable noncontrolling interests
(258,869
)
 
(17,285
)
 
(86,933
)
Third party investments in noncontrolling interests
258,300

 
171,674

 
9,600

Third party distributions of noncontrolling interests
(200,690
)
 
(127,103
)
 
(168,758
)
Third party subscriptions received (deployed) on funds and sidecars, net
458,881

 
(225,284
)
 
249,636

Net cash provided by financing activities
1,228,167

 
301,089

 
226,641

Effect of foreign currency rate changes on cash and cash equivalents and restricted cash
12,244

 
(22,632
)
 
(17,605
)
Net increase (decrease) in cash and cash equivalents and restricted cash
658,721

 
(305,447
)
 
72,975

Cash and cash equivalents and restricted cash—beginning of year
490,932

 
796,379

 
723,404

Cash and cash equivalents and restricted cash—end of year
$
1,149,653

 
$
490,932

 
$
796,379

 
 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
 
Taxes paid during the year
$
4,321

 
$
6,034

 
$
16,050

Interest paid during the year
$
54,433

 
$
54,638

 
$
55,047

The accompanying notes are an integral part of these Consolidated Financial Statements.

F-4
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)




1. Nature of the business
Validus Holdings, Ltd. (together with its wholly and majority owned subsidiaries, the “Company” or “Validus”) was incorporated under the laws of Bermuda on October 19, 2005. The Company provides reinsurance and insurance coverage, and insurance-linked securities (“ILS”) management.
Reportable Segments
In accordance with authoritative accounting guidance, the Company continually monitors and reviews its segment reporting structure to determine whether any changes have occurred that would impact the composition of the Company’s reportable segments. As a result of the evolution of the Company’s operations, the global nature of the industry and synergies obtained through the acquisition and integration of Talbot Holdings Ltd. (“Talbot”), Western World Insurance Group, Inc. (“Western World”) and Crop Risk Services, Inc. (“CRS”), the Company’s previous reportable segments had integrated in such a way that during the fourth quarter of 2017, the Company changed its reportable segments to “Reinsurance,” “Insurance,” and “Asset Management.” Furthermore, to better align the Company’s disclosures with its current strategy, the Company also changed its primary lines of business to “Property,” “Specialty - Short-tail” and “Specialty - Other.”
The change in reportable segments and primary lines of business had no impact on the Company’s historical consolidated financial positions, results of operations or cash flows as previously reported. Where applicable, all prior periods presented have been reclassified to conform to this new presentation.
A description of each of these three reportable segments is as follows:
Reinsurance
The Reinsurance segment operates as a global provider of reinsurance products and primarily concentrates on property and other reinsurance risks commonly referred to as short-tail in nature due to the relatively brief period between the occurrence and payment of a claim. The segment operates primarily through Validus Reinsurance, Ltd. (“Validus Re”) and Validus Reinsurance (Switzerland) Ltd. (“Validus Re Swiss”), as well as Lloyd’s Syndicate 1183 (the “Talbot Syndicate”), which is managed by Talbot through its wholly–owned subsidiaries. The Talbot Syndicate has a short-tail treaty reinsurance portfolio that provides the Company with access to the Lloyd’s marketplace.
Insurance
The Insurance segment operates globally and focuses on property and specialty insurance business, as well as facultative reinsurance, which provides coverage on a single-risk basis. The segment operates primarily through two insurance companies, the Talbot Syndicate and Western World. Western World provides the company access to the U.S. commercial insurance market and primarily insures small to medium size commercial and institutional risks through three wholly–owned insurance subsidiaries: Western World Insurance Company (“WWIC”), Tudor Insurance Company (“Tudor”) and Stratford Insurance Company (“Stratford”). On May 1, 2017, Western World acquired all of the outstanding capital stock of CRS, a U.S. based primary crop insurance managing general agent. Refer to Note 5, “Business combinations,” for further details.
Asset Management
The Asset Management segment participates in the market for ILS, which are financial instruments, the values of which are determined by insurance losses caused primarily by natural catastrophes such as major earthquakes and hurricanes. The Asset Management segment operates primarily through AlphaCat Managers Ltd. (“AlphaCat Managers”), an asset manager primarily for third party investors.
Corporate and Investments
The Company also has a corporate and investments function (“Corporate and Investments”), which includes the activities of the parent company, and which carries out certain functions for the group, including investment management. Detailed financial information about each of the Company’s reportable segments and Corporate and Investments is presented in Note 25, “Segment information.”

F-5
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



2. Basis of preparation and consolidation
These Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Company consolidates in these Consolidated Financial Statements the results of operations and financial position of every voting interest entity (“VOE”) in which the Company has a controlling financial interest and variable interest entity (“VIE”) in which the Company is considered to be the primary beneficiary. The consolidation assessment, including the determination as to whether an entity qualifies as a VIE or VOE, depends on the facts and circumstances surrounding each entity.
All significant intercompany accounts and transactions have been eliminated.
The preparation of these Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While the amounts included in the Consolidated Financial Statements reflect management’s best estimates and assumptions, actual results could differ from those estimates. The Company’s principal estimates include:
•the reserve for losses and loss expenses;
•the premium written on a line slip or proportional basis;
•the valuation of goodwill and intangible assets;
•the loss reserves recoverable, including the provision for uncollectible amounts; and
•the valuation of invested assets and other financial instruments.
The term “ASC” used in these notes refers to Accounting Standard Codification issued by the United States Financial Accounting Standards Board (the “FASB”).
3. Significant accounting policies
The following is a summary of significant accounting policies adopted by the Company.
(a)
Premiums
Reinsurance contracts can be written on a risks attaching or losses occurring basis. Under risks attaching reinsurance contracts, all claims from cedants’ underlying policies incepting during the contract period are covered, even if they occur after the expiration date of the reinsurance contract. In contrast, losses occurring reinsurance contracts cover all claims occurring during the period of the contract, regardless of the inception dates of the underlying policies. Any claims occurring after the expiration of the losses occurring contract are not covered.
Insurance and reinsurance premiums written are recorded at the inception of the policy. Reinsurance premiums are estimated based on information received from brokers, ceding companies and reinsureds, and any subsequent differences arising on such estimates are recorded in the periods in which they are determined.
Premiums written are earned on a pro-rated basis over the term of the related policy or contract. For direct insurance, and for facultative and losses occurring reinsurance contracts, the earnings period is generally the same as the term of the related contract or policy. For reinsurance contracts written on a risks attaching basis, the earnings period is based on the terms of the underlying contracts and policies and is generally assumed to be 24 months. The portion of the premiums written applicable to the unexpired terms of the underlying contracts and policies in force is recorded as unearned premiums.
Reinstatement premiums are recorded at the time a loss event occurs and coverage limits for the remaining life of the contract are reinstated under predefined contract terms. The accrual of reinstatement premiums is based on our estimate of losses and loss expenses, which reflects management’s judgment, as described in Note 3(c), “Reserve for losses and loss expenses” below.
(b)
Policy acquisition costs
Policy acquisition costs are costs that vary with, and are directly related to, the successful production of new and renewal business, and consist principally of commissions and brokerage expenses. Acquisition costs are shown net of commissions earned on reinsurance ceded. However, if the sum of a contract’s expected losses and loss expenses and deferred acquisition costs exceeds

F-6
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



related unearned premiums, a premium deficiency is determined to exist. In this event, deferred acquisition costs are immediately expensed to the extent necessary to eliminate the premium deficiency. If the premium deficiency exceeds deferred acquisition costs then a liability is accrued for the excess deficiency. There were no significant premium deficiency adjustments recognized during the periods presented herein.
Policy acquisition costs also include profit commissions, which are recognized on a basis consistent with our estimate of losses and loss expenses.
(c)
Reserve for losses and loss expenses
The reserve for losses and loss expenses includes reserves for unpaid reported losses (“case reserves”) and for losses incurred but not reported (“IBNR”). Case reserves are established by management based on reports from brokers, ceding companies and insureds and represents the unpaid portion of the estimated ultimate cost of events or conditions that have been reported to, or specifically identified by, the Company. IBNR reserves are established by management based on actuarially determined estimates of ultimate losses and loss expenses. Inherent in the estimate of ultimate losses and loss expenses are expected trends in claim severity and frequency and other factors which may vary significantly as claims are settled.
The period of time from the occurrence of a loss to the reporting of a loss to the Company and to the settlement of the Company’s liability may be several months or years. During this period, additional facts and trends may be revealed. Accordingly, losses and loss expenses ultimately paid may differ materially from the amounts recorded in the Consolidated Financial Statements. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. These adjustments sometimes lead to an increase or decrease in ultimate losses, and at other times lead to a reallocation between IBNR and specific case reserves. Adjustments to ultimate loss estimates, if any, are recorded in earnings in the period in which they become known. Prior period development arises from changes to these estimates recognized in the current year that relate to losses and loss expenses that were incurred in previous calendar years.
Although there is normally a lag in receiving reinsurance data from cedants, the Company currently has adequate procedures in place regarding the timeliness related to the processing of assumed reinsurance information and there is no significant backlog. The Company actively manages its relationships with brokers and clients and considers existing disputes with counterparties to be in the normal course of business.
(d)
Reinsurance
The Company enters into reinsurance and retrocession agreements in order to mitigate its accumulation of loss, reduce its liability on individual risks, enable it to underwrite policies with higher limits and increase its aggregate capacity. Ceded reinsurance premiums are accounted for on bases consistent with those used in accounting for the underlying premiums assumed. Prepaid reinsurance premiums represent the portion of premiums ceded applicable to the unexpired term of policies in force.
Loss reserves recoverable on unpaid losses represent amounts that will be collectible from reinsurers once the losses are paid. Reinsurance recoverable on paid losses represents amounts currently due from reinsurers. The recognition of reinsurance recoverable requires two key judgments. In determining the Company’s ceded IBNR, the first judgment involves the estimation of the amount of gross IBNR to be ceded to reinsurers. Ceded IBNR is developed as part of the Company’s loss reserving process and consequently, its estimation is subject to risks and uncertainties similar to the estimation of gross IBNR.
(e)
Investments
The Company classifies its fixed maturity and short-term investments as trading and accounts for its other investments in accordance with ASC Topic 825 “Financial Instruments.” As such, all investments are carried at fair value with interest and dividend income and realized and unrealized gains and losses included in net income.
All investment transactions are recorded on a first-in-first-out basis and realized gains and losses on the sale of investments are determined on the basis of amortized cost (or cost). Interest on fixed maturity securities is recorded in net investment income when earned and includes amortization of premium or accretion of discount.
For mortgage-backed securities, and any other holdings which carry the risk of prepayment, prepayment assumptions are evaluated and revised as necessary. Any adjustments required due to the resultant change in effective yields and maturities are recognized retrospectively. Prepayment fees or call premiums that are only payable to the Company when a security is called prior to its maturity, are earned when received and reflected in net investment income.

F-7
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



Short-term investments primarily comprise investments with a remaining maturity of less than one year at time of purchase and money market funds held at the Company’s investment managers. Certain short-term investments relate to funds held in trust in support of collateralized reinsurance transactions.
Restricted cash primarily relates to funds held in trust in support of collateralized reinsurance transactions.
The fair value of other investments is generally recorded on the basis of the net asset valuation criteria established by the managers of the investments, normally based upon the governing documents of such investments. In addition, due to a lag in reporting, some of the fund managers, fund administrators, or both, are unable to provide final fund valuations as of the Company’s reporting date. In these circumstances, the Company estimates the fair value of these funds by starting with the prior month’s or prior quarter’s fund valuation, adjusting these valuations for capital calls, redemptions or distributions and the impact of changes in foreign currency exchange rates, and then estimating the return for the current period. In circumstances in which the Company estimates the return for the current period, it uses all credible information available. This includes utilizing preliminary estimates reported by its fund managers, obtaining the valuation of underlying portfolio investments where such underlying investments are publicly traded and therefore have a readily observable price, using information that is available to the Company with respect to the underlying investments, reviewing various indices for similar investments or asset classes, as well as estimating returns based on the results of similar types of investments for which the Company has reported results, or other valuation methods, as necessary. Actual final fund valuations may differ, perhaps materially so, from the Company’s estimates and these differences are recorded in the period they become known as a change in estimate.
Investments in which the Company has significant influence over the operating and financial policies of the investee are accounted for under the equity method of accounting. Under this method, the Company records its proportionate share of income or loss from such investments in its results for the period.
(f)
Fair value of financial instruments
Fair value is defined as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting the highest and best use valuation concepts. ASC Topic 820 “Fair Value Measurement and Disclosure” provides a framework for measuring fair value by creating a hierarchy of fair value measurements that distinguishes market data between observable independent market inputs and unobservable market assumptions by the reporting entity. The guidance further expands disclosures about such fair value measurements. The guidance applies broadly to most existing accounting pronouncements that require or permit fair value measurements (including both financial and non-financial assets and liabilities) but does not require any new fair value measurements. The Company has adopted all authoritative guidance in effect as of the balance sheet date regarding certain market conditions that allow for fair value measurements that incorporate unobservable inputs where active market transaction based measurements are unavailable.
(g)
Derivative instruments
The Company enters into various derivative instruments in the form of foreign currency forward exchange contracts, interest rate swap contracts and weather derivative instruments. These derivative instruments are used to manage exposures to currency and interest rate risks, to enhance the efficiency of the Company’s investment portfolio and to provide protection against cedants’ financial exposure to variability in weather patterns. All of the Company’s outstanding derivative financial instruments are recognized in the Consolidated Balance Sheets at their fair values. The effect on earnings from recognizing the fair values of these derivative financial instruments depends on their intended use, their hedge designation, and their effectiveness in offsetting changes in the fair values of the exposures they are hedging.
To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the changes in the fair value or cash flows of the hedged item. The Company formally documents all relationships between designated hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The documentation process includes linking derivatives to specific assets or liabilities on the balance sheet, and assessing, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting the designated changes of the hedged items. The Company currently applies the long haul method when assessing a hedge’s effectiveness.
The Company discontinues hedge accounting prospectively when it is determined that the derivative is no longer highly effective in offsetting the designated changes of the hedged item, the derivative is de-designated as a hedging instrument, or the derivative expires or is sold, terminated or exercised. When hedge accounting is discontinued because the Company becomes aware that it is not probable that the forecasted transaction will occur, the derivative continues to be carried on the balance sheet at its fair value,

F-8
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



and gains and losses that were included as part of accumulated other comprehensive income are reclassified and recognized immediately in earnings.
Derivatives not designated as hedging instruments
Changes in the fair values of derivative instruments that are not designated as hedges are reported currently in earnings. Refer to Note 11(a), “Derivatives not designated as hedging instruments,” for further details.
Fair Value Hedges
Fair value hedges are derivative instruments designated to reduce or eliminate adverse fluctuations in the fair values of recognized assets and liabilities. Changes in the fair values of fair value hedges are reported currently in earnings along with changes in the fair values of the hedged items.
Up to September 30, 2015, the Company had designated certain foreign currency forward exchange contracts as fair value hedges, with the changes in fair value recorded as a net foreign exchange gain or loss in the Company’s Statements of Income and Comprehensive Income.
Cash Flow Hedges
Cash flow hedges are derivative instruments used to reduce or eliminate adverse fluctuations in cash flows of anticipated or forecasted transactions. Changes in their fair values are reported in equity as a component of accumulated other comprehensive income. Amounts in accumulated other comprehensive income are reclassified to earnings when the related hedged items affect earnings or the anticipated transactions are no longer probable.
(h)
Cash and cash equivalents
The Company considers time deposits and money market funds with an original maturity of one month or less as equivalent to cash.
(i)
Foreign exchange
The U.S. dollar is the functional currency of the Company and the majority of its subsidiaries. For these companies, monetary assets and liabilities denominated in foreign currencies are revalued at the exchange rates in effect at the balance sheet date and revenues and expenses denominated in foreign currencies are translated at the prevailing exchange rate on the transaction date with the resulting foreign exchange gains and losses included in earnings. Non-monetary assets and liabilities denominated in foreign currencies are revalued at the exchange rate in effect at the time of the underlying transaction.
Assets and liabilities of subsidiaries whose functional currency is not the U.S. dollar are translated at prevailing year end exchange rates. Revenue and expenses of such foreign operations are translated at average exchange rates during the year. The net effect of translation differences between functional and reporting currencies in foreign operations, net of applicable deferred income taxes, is included in accumulated other comprehensive income.
(j)
Stock plans
The Company accounts for its stock plans in accordance with the ASC Topic 718 “Compensation - Stock Compensation.” Accordingly, the Company recognizes the compensation expense for stock option grants, restricted share grants and performance share awards based on the fair value of the award on the date of grant over the requisite service period.
For the years presented, the Company assumed forfeiture rates between 5.0% and 6.8%, depending on the jurisdiction and terms of the individual awards. The Company’s forfeiture assumptions serve to reduce the unamortized grant date fair value of outstanding restricted shares as well as the associated restricted shares expense. As restricted shares are actually forfeited, the number outstanding is reduced and the expenses relating to the unvested restricted shares are reversed. True-up adjustments are made as the restricted shares approach the vesting period.
(k)
Warrants
The Company has accounted for certain warrant contracts issued to our sponsoring investors in conjunction with the capitalization of the Company, and which may be settled by the Company using either the physical settlement or net-share settlement

F-9
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



methods, in accordance with ASC Topic 815 “Derivatives and Hedging, Contracts in Entity’s Own Equity.” Accordingly, the fair value of these warrants has been recorded in equity as an addition to additional paid-in capital.
(l)
Earnings per share
Basic earnings per common share is calculated in accordance with ASC Topic 260 “Earnings per Share” by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Earnings per diluted common share are based on the weighted average number of common shares and share equivalents excluding any anti-dilutive effects of warrants, options and other awards under stock plans. Dilutive potential common shares are calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all warrants and options are used to repurchase common stock at market value. The amount of shares remaining after the proceeds are exhausted represents the potentially dilutive effect of the securities.
(m)
Income taxes and uncertain tax provisions
Deferred tax assets and liabilities are recorded in accordance with ASC Topic 740 “Income Taxes.” Consistent with ASC 740, the Company records deferred income taxes which reflect operating losses and tax credits carried forward and the tax effect of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax bases.
The Company and its Bermuda domiciled subsidiaries are not subject to any income, withholding or capital gains taxes under current Bermuda law. The Company has operating subsidiaries in various other jurisdictions around the world, including but not limited to the U.K., U.S., Switzerland, Luxembourg and Canada that are subject to relevant taxes in those jurisdictions.
The Company recognizes the tax benefits of uncertain tax positions only where the position is more likely than not to be sustained upon examination by tax authorities based upon the technical merits of the position. Based on the more-likely-than-not recognition threshold, we must presume that the tax position will be subject to examination by a taxing authority with full knowledge of all relevant information. If the recognition threshold is met, then the tax position is measured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement. The Company classifies all interest and penalties related to uncertain tax positions in income tax expenses.
(n)
Business combinations, goodwill and intangible assets
The Company accounts for business combinations in accordance with ASC Topic 805 “Business Combinations” and goodwill and intangible assets that arise from business combinations in accordance with ASC Topic 350 “Intangibles – Goodwill and Other.”
A purchase price paid that is in excess of the fair value of the net assets acquired (“goodwill”) arising from a business combination is recorded as an asset, and is not amortized. Intangible assets with a finite life are amortized over the estimated useful life of the assets, whereas intangible assets with an indefinite useful life are not amortized.
Goodwill and intangible assets are assessed for impairment on an annual basis or more frequently if events or changes in circumstances indicate that it is more likely than not that an impairment exists. Such events or circumstances may include an economic downturn in a geographic market or change in the assessment of future operations. In performing this assessment, the Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative goodwill impairment test. Similarly, the Company may first assess qualitative factors to determine whether it is more likely than not that an other intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. The factors assessed in making this determination included the overall insurance industry outlook, business strategy, premium rates, earnings sustainability, market capitalization and the regulatory and political environment.
If goodwill or intangible assets are impaired, they are written down to their fair value with a corresponding expense reflected in the Consolidated Statements of Income and Comprehensive Income.
(o)
Variable interest entities
The Company determines whether it has relationships with entities defined as VIEs in accordance with ASC Topic 810 “Consolidation.” A VIE is consolidated by the variable interest holder that is determined to be the primary beneficiary.

F-10
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



An entity in which the Company holds a variable interest is a VIE if any of the following conditions exist: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support, (b) as a group, the holders of equity investment at risk lack either the direct or indirect ability through voting rights or similar rights to make decisions about an entity’s activities that most significantly impact the entity’s economic performance or the obligation to absorb the expected losses or right to receive the expected residual returns, or (c) the voting rights of some investors are disproportionate to their obligation to absorb the expected losses of the entity, their rights to receive the expected residual returns of the entity, or both and substantially all of the entity’s activities either involve or are conducted on behalf of an investor with disproportionately few voting rights.
The primary beneficiary is defined as the variable interest holder that is determined to have the controlling financial interest as a result of having both (a) the power to direct the activities of a VIE that most significantly impact the economic performance of the VIE and (b) the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. At inception of the VIE, as well as following an event that requires reassessment, the Company determines whether it is the primary beneficiary based on the facts and circumstances surrounding each entity.
(p)
Noncontrolling interests
The Company accounts for its noncontrolling interests in accordance with ASC Topic 810 “Consolidation.” Redeemable noncontrolling interests are presented as a mezzanine item, between liabilities and shareholders’ equity, in the Company’s Consolidated Balance Sheet and the non-redeemable noncontrolling interests are presented within shareholders’ equity in the Company’s Consolidated Balance Sheets and Consolidated Statements of Shareholders’ Equity. The net (income) loss attributable to noncontrolling interests is presented separately in the Company’s Consolidated Statements of Income and Comprehensive Income.
4. Recent accounting pronouncements
Accounting Standards Adopted in 2017
In March 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-07, “Investments - Equity Method and Joint Ventures (Topic 323) - Simplifying the Transition to the Equity Method of Accounting.” The amendments in this ASU eliminate the requirement to retroactively adopt the equity method of accounting when an investment becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments in this ASU became effective for the Company on January 1, 2017. Adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting.” The amendments in this ASU simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The amendments in this ASU became effective for the Company on January 1, 2017. Adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.
In October 2016, the FASB issued ASU 2016-17, “Consolidation (Topic 810) - Interests Held Through Related Parties That Are Under Common Control.” The amendments in this ASU do not change the characteristics of a primary beneficiary in current U.S. GAAP. Rather, the ASU requires that a reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, include all of its direct variable interests in a VIE and, on a proportionate basis, its indirect variable interests in a VIE held through related parties, including related parties that are under common control with the reporting entity. The amendments in this ASU became effective for the Company on January 1, 2017. Adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 320) - Restricted Cash.” This ASU is directed at reducing diversity that exists in the classification and presentation of changes in restricted cash on the statement of cash flows. The ASU is effective for fiscal periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. During the fourth quarter of 2017, the Company early adopted and implemented this guidance utilizing the full retrospective approach for all periods presented in the Company’s Consolidated Financial Statements.
As a result of the adoption of ASU 2016-18, the Company’s Consolidated Statements of Cash Flows now explain the change during the period in the total of cash, cash equivalents, and restricted cash. Therefore, restricted cash is now included with cash and cash equivalents in the reconciliation the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.

F-11
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



Prior to adoption, changes in restricted cash had been presented as a cash flow provided by (used in) investing activities. Consequently, the Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015 include revisions to increase net cash used in investing activities by $2,314 and $99,733, respectively.
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815).” This ASU is directed at targeted improvements to accounting for hedging activities. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. During the fourth quarter of 2017, the Company early adopted and implemented this guidance with the effect of the adoption reflected as of January 1, 2017 in these Consolidated Financial Statements. Adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.
Recently Issued Accounting Standards Not Yet Adopted
In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220).” Current GAAP requires that deferred tax liabilities and assets be adjusted for the effect of a change in tax laws or rates with the effect included in net income. This guidance is applicable even in situations in which the related income tax effects on items in accumulated other comprehensive income were originally recognized in other comprehensive income (rather than in net income). The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for the tax effects of items within accumulated other comprehensive income (referred to as “stranded tax effects”) resulting from the Tax Cuts and Jobs Act enacted by the U.S. on December 22, 2017 (“2017 Tax Act”). Consequently, the amendments eliminate the stranded tax effects resulting from the 2017 Tax Act. The amendments in this Update also require certain disclosures about stranded tax effects. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company has evaluated the impact of this guidance and has determined that it will not have a material impact on the Company’s Consolidated Financial Statements. The Company intends to adopt this guidance on January 1, 2019.
5. Business combinations
American International Group, Inc. (“AIG”)
On January 21, 2018, the Company entered into a definitive agreement and plan of merger with AIG. Refer to Note 27, “Subsequent Events,” for further details.
CRS
On May 1, 2017, Western World, a wholly–owned subsidiary of the Company acquired all of the outstanding capital stock of CRS for an aggregate purchase price of $185,576 in cash. CRS is a primary crop insurance managing general agent (“MGA”) based in Decatur, Illinois with 1,170 agents across 36 states. CRS does not have insurance licenses of its own, but acts solely as an MGA in that it can produce business for any properly licensed entity on a commission basis. Concurrent with closing of the transaction, Stratford, a wholly–owned subsidiary of Western World, was granted the required licenses to write crop insurance in the United States and executed several agreements to transfer the related agriculture book of business to Stratford.    
The CRS acquisition was undertaken to expand the Company’s presence in U.S. primary specialty lines.
For segmental reporting purposes, the results of CRS’ operations, including the related agricultural book of business have been included within the Insurance segment in the Consolidated Financial Statements from the date of acquisition.
On closing, the Company recorded intangible assets totaling $63,921 for Distribution Channels, Trade Name and Technology. Distribution Channels and Trade Name were estimated to have finite useful economic lives of ten years on acquisition and are being amortized on a straight line basis over such period. Technology was estimated to have a finite useful economic life of two years on acquisition and is being amortized on a straight line basis over such a period.
The purchase price was allocated to the acquired assets and liabilities of CRS based on estimated fair values on May 1, 2017, the date the transaction closed, as detailed below. The Company recognized goodwill of $30,943 primarily attributable to CRS’ assembled workforce and synergies expected to result upon the integration of CRS and its related book of business into the Company’s operations. The estimates of fair values for tangible assets acquired and liabilities assumed were determined by management based on various market and income analyses. The Company estimated the fair values of intangible assets acquired based on variations of the income and cost approaches. Significant judgment was required to arrive at these estimates of fair value and changes to assumptions used could have led to materially different results.

F-12
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



The purchase of CRS was a taxable transaction and as such, goodwill and intangibles recorded at closing will be deductible for income tax purposes. The Company has recognized and recorded a deferred tax asset of $6,443 which results from the excess of tax-deductible goodwill over book value goodwill as recognized in the purchase price allocation.
The fair value of net assets acquired, including GAAP adjustments, are summarized as follows:
Total purchase price
 
 
$
185,576

Assets acquired
 
 
 
Cash and cash equivalents
$
1,653

 
 
Premiums receivable
537,383

 
 
Prepaid reinsurance premiums
227,157

 
 
Other assets
184,216

 
 
Tangible assets acquired
 
 
950,409

Intangible asset - Distribution channels
$
52,898

 
 
Intangible asset - Trade name
9,568

 
 
Intangible asset - Technology
1,455

 
 
Intangible assets acquired
 
 
63,921

Deferred tax arising on Goodwill
 
 
6,443

Liabilities acquired
 
 
 
Reinsurance balances payable
294,201

 
 
Unearned premiums
406,649

 
 
Net loss reserves
42,575

 
 
Other liabilities
122,715

 
 
Liabilities acquired
 
 
866,140

Excess purchase price (goodwill) at acquisition
 
 
$
30,943

Measurement period adjustments (a)
 
 
1,872

Excess purchase price (goodwill) at December 31, 2017
 
 
$
32,815

(a)
During the year ended December 31, 2017, the Company recorded tax related measurement period adjustments of $1,872.
The Company also incurred transaction expenses related to the CRS acquisition of $4,427. Transaction expenses included legal, financial advisory and audit related services.
For details on the intangible assets acquired, refer to Note 6, “Goodwill and other intangible assets.”
Operating results of CRS have been included in the Consolidated Financial Statements from the May 1, 2017 acquisition date. The following selected unaudited information has been provided to present a summary of the results of CRS that have been included in the Consolidated Financial Statements for the year ended December 31, 2017:
 
Year Ended December 31, 2017
 
Unaudited
Total underwriting revenues
$
236,769

Total underwriting deductions
$
183,637

Underwriting income, before general and administrative expenses
$
53,132



F-13
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



6. Goodwill and intangible assets
The following tables present a reconciliation of the beginning and ending goodwill and intangible assets for the years ended December 31, 2017 and 2016:
 
Year Ended December 31, 2017
 
Goodwill
 
Intangible Assets
 
Reinsurance Segment
 
Insurance Segment
 
Total
 
Reinsurance Segment
 
Insurance Segment
 
Total
Balance, beginning of year
$
2,039

 
$
194,719

 
$
196,758

 
$
9,392

 
$
106,200

 
$
115,592

Additions
—

 
30,943

 
30,943

 
—

 
64,080

 
64,080

Amortization
—

 
—

 
—

 
(208
)
 
(8,053
)
 
(8,261
)
Measurement period adjustments (a)
—

 
1,872

 
1,872

 
—

 
—

 
—

Balance, end of year
$
2,039

 
$
227,534

 
$
229,573

 
$
9,184

 
$
162,227

 
$
171,411

(a)
During the year ended December 31, 2017, the Company recorded tax related measurement period adjustments of $1,872.
 
Year Ended December 31, 2016
 
Goodwill
 
Intangible Assets
 
Reinsurance Segment
 
Insurance Segment
 
Total
 
Reinsurance Segment
 
Insurance Segment
 
Total
Balance, beginning of year
$
2,039

 
$
194,719

 
$
196,758

 
$
9,808

 
$
111,450

 
$
121,258

Amortization
—

 
—

 
—

 
(416
)
 
(5,250
)
 
(5,666
)
Balance, end of year
$
2,039

 
$
194,719

 
$
196,758

 
$
9,392

 
$
106,200

 
$
115,592

 
Year Ended December 31, 2017
 
Year Ended December 31, 2016
 
Intangible Assets
 
Intangible Assets
 
With a Finite Life
 
With an Indefinite Life
 
Total
 
With a Finite Life
 
With an Indefinite Life
 
Total
Balance, beginning of year
$
11,424

 
$
104,168

 
$
115,592

 
$
17,090

 
$
104,168

 
$
121,258

Additions
64,080

 
—

 
64,080

 
—

 
—

 
—

Amortization
(8,261
)
 
—

 
(8,261
)
 
(5,666
)
 
—

 
(5,666
)
Balance, end of year
$
67,243

 
$
104,168

 
$
171,411

 
$
11,424

 
$
104,168

 
$
115,592

Goodwill relates to the Company’s 2007 acquisition of Talbot, 2014 acquisition of Western World and 2017 acquisition of CRS.
Intangible assets with a finite life includes the distribution network, technology, trade name and customer relationships related to the Company’s acquisitions of Talbot, Western World and CRS. These assets are amortized on a straight-line basis over a period ranging from two to ten years. Amortization expense associated with these assets for the years ended December 31, 2017, 2016 and 2015 was $8,261, $5,666 and $5,666, respectively.
Intangible assets with an indefinite life consist of Lloyd’s Syndicate capacity related to the Company’s acquisition of Talbot, along with U.S. state licenses that provide a legal right to transact business indefinitely which were acquired with the Company’s acquisition of Western World.
The Company completed its qualitative and quantitative assessments of goodwill and other intangible assets and concluded that there had been no impairment as at December 31, 2017 and 2016.

F-14
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



The gross carrying values, accumulated amortization and net carrying values of other intangible assets by type as at December 31, 2017 and 2016 were as follows:
 
December 31, 2017
 
December 31, 2016
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Intangible assets with a finite life
 
 
 
 
 
 
 
 
 
 
 
Trade name and customer relationships
$
27,757

 
$
(14,940
)
 
$
12,817

 
$
18,189

 
$
(13,406
)
 
$
4,783

Distribution network
92,729

 
(40,218
)
 
52,511

 
39,831

 
(34,468
)
 
5,363

Technology
3,937

 
(2,022
)
 
1,915

 
2,323

 
(1,045
)
 
1,278

Total
$
124,423

 
$
(57,180
)
 
$
67,243

 
$
60,343

 
$
(48,919
)
 
$
11,424

 
 
 
 
 
 
 
 
 
 
 
 
Intangible assets with an indefinite life
 
 
 
 
 
 
 
 
 
 
Syndicate capacity
$
91,843

 
n/a
 
$
91,843

 
$
91,843

 
n/a
 
$
91,843

State licenses
12,325

 
n/a
 
12,325

 
12,325

 
n/a
 
12,325

Total
$
104,168

 
 
 
$
104,168

 
$
104,168

 
 
 
$
104,168

The estimated aggregate amortization expense for the Company’s intangible assets with a finite life is as follows:
 
Estimated Aggregate Amortization Expense, by Period
2018
$
8,511

2019
7,910

2020
7,319

2021
7,319

2022
7,306

2023 and thereafter
28,878

 
$
67,243



F-15
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



7. Investments
Managed investments represent assets governed by the Company’s investment policy statement (“IPS”) whereas, non-managed investments represent assets held in support of consolidated AlphaCat VIEs which are not governed by the Company’s IPS. Refer to Note 9, “Variable interest entities,” for further details.
The amortized cost (or cost) and fair value of the Company’s investments as at December 31, 2017 and 2016 were as follows:
 
December 31, 2017
 
December 31, 2016
 
Amortized 
Cost or Cost
 

Fair Value
 
Amortized 
Cost or Cost
 
Fair Value
Managed investments
 
 
 
 
 
 
 
U.S. government and government agency
$
733,510

 
$
727,397

 
$
809,392

 
$
804,126

Non-U.S. government and government agency
310,845

 
312,239

 
245,651

 
240,791

U.S. states, municipalities and political subdivisions
201,347

 
201,303

 
271,742

 
271,830

Agency residential mortgage-backed securities
984,387

 
978,049

 
684,490

 
679,595

Non-agency residential mortgage-backed securities
40,264

 
40,373

 
15,858

 
15,477

U.S. corporate
1,531,498

 
1,533,395

 
1,540,036

 
1,534,508

Non-U.S. corporate
420,522

 
422,249

 
418,520

 
410,227

Bank loans
450,320

 
442,951

 
579,121

 
570,399

Asset-backed securities
657,234

 
658,303

 
528,563

 
526,814

Commercial mortgage-backed securities
315,002

 
312,395

 
333,740

 
330,932

Total fixed maturities
5,644,929

 
5,628,654

 
5,427,113

 
5,384,699

Short-term investments
229,968

 
230,011

 
228,574

 
228,386

Other investments
 
 
 
 
 
 
 
Fund of hedge funds
—

 
—

 
1,457

 
955

Hedge funds
6,954

 
15,774

 
11,292

 
17,381

Private equity investments
63,684

 
78,407

 
66,383

 
82,627

Fixed income investment funds
203,167

 
204,426

 
247,967

 
249,275

Overseas deposits
56,611

 
56,611

 
50,106

 
50,106

Mutual funds
—

 
—

 
2,925

 
5,368

Total other investments
330,416

 
355,218

 
380,130

 
405,712

Investments in investment affiliates (a)
61,944

 
100,137

 
84,840

 
100,431

Total managed investments
$
6,267,257

 
$
6,314,020

 
$
6,120,657

 
$
6,119,228

Non-managed investments
 
 
 
 
 
 
 
Catastrophe bonds
$
231,332

 
$
229,694

 
$
157,486

 
$
158,331

Short-term investments
3,151,746

 
3,151,746

 
2,567,784

 
2,567,784

Total non-managed investments
3,383,078

 
3,381,440

 
2,725,270

 
2,726,115

Total investments
$
9,650,335

 
$
9,695,460

 
$
8,845,927

 
$
8,845,343

(a)
The Company’s investments in investment affiliates have been treated as equity method investments with the corresponding gains and losses recorded in income as “Income (loss) from investment affiliates.”


F-16
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



(a)
Fixed maturity investments
The following table sets forth certain information regarding Standard & Poor’s credit quality ratings (or an equivalent rating with another recognized rating agency) of the Company’s fixed maturity investments as at December 31, 2017 and 2016:
 
December 31, 2017
 
December 31, 2016
 
Fair Value
 
% of Total
 
Fair Value
 
% of Total
Managed fixed maturities
 
 
 
 
 
 
 
AAA
$
2,715,074

 
46.4
%
 
$
2,405,597

 
43.4
%
AA
442,397

 
7.6
%
 
538,289

 
9.7
%
A
1,137,795

 
19.4
%
 
1,081,949

 
19.5
%
BBB
828,392

 
14.1
%
 
740,861

 
13.4
%
Total investment grade managed fixed maturities
5,123,658

 
87.5
%
 
4,766,696

 
86.0
%
BB
168,967

 
2.9
%
 
213,568

 
3.9
%
B
237,131

 
4.0
%
 
177,737

 
3.2
%
CCC
18,217

 
0.3
%
 
13,371

 
0.2
%
NR
80,681

 
1.4
%
 
213,327

 
3.8
%
Total non-investment grade managed fixed maturities
504,996

 
8.6
%
 
618,003

 
11.1
%
Total managed fixed maturities
$
5,628,654

 
96.1
%
 
$
5,384,699

 
97.1
%
 
 
 
 
 
 
 
 
Non-managed catastrophe bonds
 
 
 
 
 
 
 
BB
22,110

 
0.3
%
 
29,731

 
0.6
%
B
3,265

 
0.1
%
 
4,524

 
0.1
%
NR
204,319

 
3.5
%
 
124,076

 
2.2
%
Total non-investment grade non-managed catastrophe bonds
229,694

 
3.9
%
 
158,331

 
2.9
%
Total non-managed catastrophe bonds
229,694

 
3.9
%
 
158,331

 
2.9
%
Total fixed maturities
$
5,858,348

 
100.0
%
 
$
5,543,030

 
100.0
%


F-17
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



The amortized cost and fair values for the Company’s fixed maturity investments held at December 31, 2017 and 2016 are shown below by contractual maturity. Actual maturity may differ from contractual maturity due to prepayment rights associated with certain investments.
 
December 31, 2017
 
December 31, 2016
 
Amortized Cost or Cost
 
Fair Value
 
Amortized Cost or Cost
 
Fair Value
Managed fixed maturities
 
 
 
 
 
 
 
Due in one year or less
$
343,360

 
$
343,541

 
$
350,733

 
$
346,161

Due after one year through five years
2,527,018

 
2,513,620

 
2,954,856

 
2,933,146

Due after five years through ten years
577,347

 
577,109

 
430,365

 
426,647

Due after ten years
200,317

 
205,264

 
128,508

 
125,927

 
3,648,042

 
3,639,534

 
3,864,462

 
3,831,881

Asset-backed and mortgage-backed securities
1,996,887

 
1,989,120

 
1,562,651

 
1,552,818

Total managed fixed maturities
$
5,644,929

 
$
5,628,654

 
$
5,427,113

 
$
5,384,699

 
 
 
 
 
 
 
 
Non-managed catastrophe bonds
 
 
 
 
 
 
 
Due in one year or less
$
88,797

 
$
88,367

 
$
43,664

 
$
45,418

Due after one year through five years
140,035

 
138,844

 
112,572

 
111,656

Due after five years through ten years
2,500

 
2,483

 
1,250

 
1,257

Total non-managed catastrophe bonds
231,332

 
229,694

 
157,486

 
158,331

Total fixed maturities
$
5,876,261

 
$
5,858,348

 
$
5,584,599

 
$
5,543,030

(b)
Other investments
The following tables set forth certain information regarding the Company’s other investment portfolio as at December 31, 2017 and 2016:
 
 
December 31, 2017
 
 
Fair Value
 
Investments with redemption restrictions
 
Investments without redemption restrictions
 
Redemption frequency (a)
 
Redemption notice period (a)
Hedge funds
 
$
15,774

 
$
15,774

 
$
—

 
 
 
 
Private equity investments
 
78,407

 
78,407

 
—

 
 
 
 
Fixed income investment funds
 
204,426

 
200,532

 
3,894

 
Daily
 
Daily to 2 days
Overseas deposits
 
56,611

 
56,611

 
—

 
 
 
 
Total other investments
 
$
355,218

 
$
351,324

 
$
3,894

 
 
 
 

F-18
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



 
 
December 31, 2016
 
 
Fair Value
 
Investments with redemption restrictions
 
Investments without redemption restrictions
 
Redemption frequency (a)
 
Redemption notice period (a)
Fund of hedge funds
 
$
955

 
$
955

 
$
—

 
 
 
 
Hedge funds
 
17,381

 
17,381

 
—

 
 
 
 
Private equity investments
 
82,627

 
82,627

 
—

 
 
 
 
Fixed income investment funds
 
249,275

 
218,333

 
30,942

 
Daily
 
2 days
Overseas deposits
 
50,106

 
50,106

 
—

 
 
 
 
Mutual funds
 
5,368

 
—

 
5,368

 
Daily
 
Daily
Total other investments
 
$
405,712

 
$
369,402

 
$
36,310

 
 
 
 
(a)     The redemption frequency and notice periods only apply to investments without redemption restrictions.
Other investments include investments in various funds and pooled investment schemes. These alternative investments employ various investment strategies primarily involving, but not limited to, investments in collateralized obligations, fixed income securities, private equities, distressed debt and equity securities. Certain debt-like investments totaling $186,734 (December 31, 2016: $265,796) are either rated or consist of underlying securities or instruments which carry credit ratings issued by nationally recognized statistical rating organizations. Other equity-like investments totaling $168,484 (December 31, 2016: $139,916) are unrated given the nature of their underlying assets, such as private equity investments, and as such do not carry credit ratings.
Certain securities included in other investments are subject to redemption restrictions. Distributions from these funds will be received as the underlying investments of the funds are liquidated. Currently, it is not known to the Company when these underlying assets will be sold by their investment managers; however, it is estimated that the majority of the underlying assets of the investments will liquidate over five to ten-year periods from inception of the funds. In addition, one of the fixed income investment funds with a fair value of $130,123 (December 31, 2016: $184,749), has various lock-up periods of approximately two years or less as at December 31, 2017 and may also impose a redemption gate. A lock-up period refers to the initial amount of time an investor is contractually required to remain invested before having the ability to redeem. Typically, the imposition of a gate delays a portion of the requested redemption, with the remaining portion settled in cash shortly after the redemption date. Furthermore, the underlying investments held in the overseas deposit funds are liquid and will generally trade freely in an open market. However, the Company’s ability to withdraw from the overseas deposit funds is restricted by annual and quarterly funding and release processes for Lloyd’s market participants.
The Company’s maximum exposure to any of these alternative investments is limited to the invested amounts and any remaining capital commitments. Refer to Note 22, “Commitments and contingencies,” for further details. As at December 31, 2017, the Company does not have any plans to sell any of the other investments listed above.
(c)
Investments in investment affiliates
Included in the Company’s managed investment portfolio as at December 31, 2017 are investments in Aquiline Financial Services Fund II L.P. (“Aquiline II”), Aquiline Financial Services Fund III L.P. (“Aquiline III”), Aquiline Technology Growth Fund L.P. (“Aquiline Tech”) and Aquiline Armour Co-Invest L.P. (“Aquiline Armour”).
Aquiline II
On December 20, 2011, the Company entered into an Assignment and Assumption Agreement (the “Agreement”) with Aquiline Capital Partners LLC, a Delaware limited liability company (the “Assignor”) and Aquiline Capital Partners II GP (Offshore) Ltd., a Cayman Islands company limited by shares (the “Aquiline II General Partner”) pursuant to which the Company has assumed 100% of the Assignor’s interest in Aquiline Financial Services Fund II L.P. (the “Aquiline II Partnership”) representing a total capital commitment of $50,000 (the “Aquiline II Commitment”), as a limited partner in the Partnership (the “Transferred Interest”). The Transferred Interest is governed by the terms of an Amended and Restated Exempted Limited Partnership Agreement of the Fund.
On October 2, 2014, the Company assumed an additional investment in the Aquiline II Partnership as part of the Western World acquisition representing a total capital commitment of $10,000. This interest is also governed by the terms of the Aquiline II Limited Partnership Agreement.

F-19
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



The Aquiline II Partnership is a VIE and the Company is not the primary beneficiary. The Company’s investment in the Aquiline II Partnership has been treated as an equity method investment. The Aquiline II Partnership provides a quarterly capital account statement, with a three month delay in its valuation, which was used as the basis for calculating the Company’s share of partnership income for the period.
In accordance with the terms of the Agreement, no limited partner has the right to withdraw from the Aquiline II Partnership or to withdraw any part of its capital account without prior consent from the Aquiline II General Partner. The Company’s maximum exposure to the Aquiline II Partnership is limited to the amount invested and any remaining capital commitment. Refer to Note 22, “Commitments and contingencies,” for further details.
Aquiline III
On November 7, 2014, the Company entered into a Subscription Agreement (the “Subscription Agreement”) with Aquiline Capital Partners III GP (Offshore) Ltd., a Cayman Islands company limited by shares (the “Aquiline III General Partner”) pursuant to which the Company committed and agreed to purchase limited partnership or other comparable limited liability equity interests (the “Limited Partnership Interests”) in Aquiline Financial Services Fund III L.P., a Cayman Islands exempted limited partnership (the “Aquiline III Partnership”), and/or one or more Alternative Investment Vehicles and Intermediate Entities (together with the Aquiline III Partnership, the “Fund” or the “Entities”) with a capital commitment (the “Aquiline III Commitment”) in an amount equal to $100,000, as a limited partner in the Aquiline III Partnership. The Limited Partnership Interests are governed by the terms of an Amended and Restated Exempted Limited Partnership Agreement.
The Aquiline III Partnership is a VIE and the Company is not the primary beneficiary. Therefore, the Company’s investment in the Aquiline III Partnership has been treated as an equity method investment. The Aquiline III Partnership provides a quarterly capital account statement, with a three month delay in its valuation, which was used as the basis for calculating the Company’s share of partnership income for the period.
In accordance with the terms of the Agreement, no limited partner has the right to withdraw from the Aquiline III Partnership or to withdraw any part of its capital account without prior consent from the Aquiline III General Partner. The Company’s maximum exposure to the Aquiline III Partnership is limited to the amount invested and any remaining capital commitment. Refer to Note 22, “Commitments and contingencies,” for further details.
Aquiline Tech
On March 20, 2017, the Company entered into a Subscription Agreement with Aquiline Technology Growth GP Ltd, (the “Aquiline Tech General Partner”) pursuant to which the Company committed and agreed to purchase limited partnership or other comparable limited liability equity interests (the “Limited Partnership Interests”) in Aquiline Tech, a Cayman Islands exempted limited partnership (the “Aquiline Tech Partnership”), with a capital commitment in an amount equal to $20,000. The limited partnership interests are governed by the terms of an amended and restated exempted limited partnership agreement.
The Aquiline Tech Partnership is a VIE and the Company is not the primary beneficiary. Therefore, the Company’s investment in the Aquiline Tech Partnership has been treated as an equity method investment. The Aquiline Tech Partnership provides a quarterly capital account statement, with a three month delay in its valuation, which was used as the basis for calculating the Company’s share of partnership income for the period.
In accordance with the terms of the Agreement, no limited partner has the right to withdraw from the Aquiline Tech Partnership or to withdraw any part of its capital account without prior consent from the Aquiline Tech General Partner. The Company’s maximum exposure to the Aquiline Tech Partnership is limited to the amount invested and any remaining capital commitment. Refer to Note 22, “Commitments and contingencies,” for further details.
Aquiline Armour
On December 22, 2017, the Company entered into a Subscription Agreement with Aquiline Co-Invest III GP Ltd., a Cayman Islands exempted company (the “Aquiline Armour General Partner”) pursuant to which the Company committed and agreed to purchase limited partnership or other comparable limited liability equity interests in Aquiline Armour, a Cayman Islands exempted limited partnership (the “Aquiline Armour Partnership”), and/or one or more Alternative Investment Vehicles and Intermediate Entities (together with the Aquiline Armour Partnership, the “Fund” or the “Entities”) with a capital commitment (the “Aquiline Armour Commitment”) in an amount equal to $40,340 as a limited partner in the Aquiline Armour Partnership. As at December 31,

F-20
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



2017, no capital contributions had been made in relation to this commitment. The Limited Partnership Interests are governed by the terms of an Amended and Restated Exempted Limited Partnership Agreement dated as of December 22, 2017.
The Aquiline Armour Partnership is a VIE and the Company is not the primary beneficiary. Therefore, the Company’s investment in the Aquiline Armour Partnership has been treated as an equity method investment. The Aquiline Armour Partnership provides a quarterly capital account statement, with a three month delay in its valuation, which was used as the basis for calculating the Company’s share of partnership income for the period.
In accordance with the terms of the Agreement, no limited partner has the right to withdraw from the Aquiline Armour Partnership or to withdraw any part of its capital account without prior consent from the Aquiline Armour General Partner. The Company’s maximum exposure to the Aquiline Armour Partnership is limited to the amount invested and any remaining capital commitment. Refer to Note 22, “Commitments and contingencies,” for further details.
The following table presents a reconciliation of the Company’s beginning and ending investments in investment affiliates for the years ended December 31, 2017 and 2016:
 
Years Ended December 31,
 
2017
 
2016
Investment affiliates, beginning of year
$
100,431

 
$
87,673

Net capital (distributions) contributions
(22,304
)
 
14,841

Income (loss) from investment affiliate
22,010

 
(2,083
)
Investment affiliates, end of year
$
100,137

 
$
100,431

The following table presents the Company’s investments in the partnerships as at December 31, 2017 and 2016:
 
December 31, 2017
 
Investment at cost
 
Voting ownership %
 
Equity ownership %
 
Carrying value
Aquiline II
$
33,349

 
—
%
 
8.1
%
 
$
51,914

Aquiline III
24,737

 
—
%
 
9.0
%
 
44,733

Aquiline Tech
3,858

 
—
%
 
10.6
%
 
3,490

Total investments in investment affiliates
$
61,944

 
 
 
 
 
$
100,137

 
 
 
 
 
 
 
 
 
December 31, 2016
 
Investment at cost
 
Voting ownership %
 
Equity ownership %
 
Carrying value
Aquiline II
$
46,871

 
—
%
 
8.1
%
 
$
61,999

Aquiline III
37,969

 
—
%
 
9.0
%
 
38,432

Total investments in investment affiliates
$
84,840

 
 
 
 
 
$
100,431


F-21
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



(d)
Net investment income
Net investment income was derived from the following sources:
 
Years Ended December 31,
 
2017
 
2016
 
2015
Managed investments
 
 
 
 
 
Fixed maturities and short-term investments
$
127,600

 
$
119,085

 
$
113,627

Other investments
29,930

 
27,860

 
13,307

Cash and cash equivalents and restricted cash
4,069

 
2,939

 
1,911

Securities lending income
25

 
55

 
16

Total gross investment income
161,624

 
149,939

 
128,861

Investment expenses
(8,669
)
 
(8,221
)
 
(7,695
)
Total managed net investment income
$
152,955

 
$
141,718

 
$
121,166

Non managed investments
 
 
 
 
 
Fixed maturities and short-term investments
$
14,833

 
$
6,931

 
$
6,528

Cash and cash equivalents and restricted cash
10,085

 
1,736

 
130

Total non-managed net investment income
24,918

 
8,667

 
6,658

Total net investment income
$
177,873

 
$
150,385

 
$
127,824

Net investment income from other investments includes distributed and undistributed net income from certain fixed income investment funds.
(e)
Net realized gains and change in net unrealized gains (losses) on investments
The following table sets forth an analysis of net realized gains and the change in net unrealized gains (losses) on investments:
 
Years Ended December 31,
 
2017
 
2016
 
2015
Managed investments
 
 
 
 
 
Gross realized gains
$
25,070

 
$
22,491

 
$
15,678

Gross realized (losses)
(17,633
)
 
(7,811
)
 
(13,980
)
Net realized gains on investments
7,437

 
14,680

 
1,698

Change in net unrealized gains (losses) on investments
6,371

 
14,106

 
(32,007
)
Total net realized and change in net unrealized gains (losses) on managed investments
$
13,808

 
$
28,786

 
$
(30,309
)
Non-managed investments
 
 
 
 
 
Gross realized gains
$
2,105

 
$
1,086

 
$
611

Gross realized (losses)
(1,919
)
 
(9
)
 
(11
)
Net realized gains on investments
186

 
1,077

 
600

Change in net unrealized (losses) gains on investments
(3,156
)
 
2,765

 
(388
)
Total net realized and change in net unrealized (losses) gains on non-managed investments
(2,970
)
 
3,842

 
212

Total net realized and change in net unrealized gains (losses) on total investments
$
10,838

 
$
32,628

 
$
(30,097
)

F-22
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



(f)
Pledged investments and cash
As at December 31, 2017, the Company had $5,853,744 (December 31, 2016: $5,173,966) of cash and cash equivalents, restricted cash, short-term investments and fixed maturity investments that were pledged during the normal course of business. Of those, $5,789,081 were held in trust (December 31, 2016: $5,068,092). Pledged assets are generally for the benefit of the Company’s cedants and policyholders, to support AlphaCat’s fully collateralized reinsurance transactions, as collateral for derivative instruments and to facilitate the accreditation of Validus Re, Validus Re Swiss and the Talbot Syndicate as alien (re)insurers by certain regulators.
In addition, the Company has pledged cash and investments as collateral under the Company’s credit facilities in the amount of $576,864 (December 31, 2016: $442,184). For further details on the credit facilities, refer to Note 19 “Debt and financing arrangements.”
(g)
Securities lending
The Company participates in a securities lending program whereby certain securities from its portfolio are loaned to third parties for short periods of time through a lending agent. The Company retains all economic interest in the securities it lends and receives a fee from the borrower for the temporary use of the securities. Collateral in the form of cash, government securities and letters of credit is required at a rate of 102% of the market value of the loaned securities and is held by a third party.
8. Fair value measurements
(a)
Classification within the fair value hierarchy
Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants. Under U.S. GAAP, a company must determine the appropriate level in the fair value hierarchy for each fair value measurement. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or liability, into three levels. It gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The level in the fair value hierarchy within which a fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The three levels of the fair value hierarchy are described below:
Level 1 - Fair values are measured based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access.
Level 2 - Fair values are measured based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
Level 3 - Fair values are measured based on unobservable inputs that reflect the Company’s own judgments about assumptions where there is little, if any, market activity for that asset or liability that market participants might use.
The availability of observable inputs can vary from financial instrument to financial instrument and is affected by a wide variety of factors including, for example, the type of financial instrument, whether the financial instrument is new and not yet established in the marketplace, and other characteristics particular to the instrument. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment.
Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This may lead the Company to change the selection of the valuation technique (for example, from market to cash flow approach) or to use multiple valuation techniques to estimate the fair value of a financial instrument. These circumstances could cause an instrument to be reclassified between levels within the fair value hierarchy.



F-23
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



At December 31, 2017, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:
 
Level 1
 
Level 2
 
Level 3
 
Fair value based on NAV practical expedient (a)
 
Total
Managed investments
 
 
 
 
 
 
 
 
 
U.S. government and government agency
$
—

 
$
727,397

 
$
—

 
$
—

 
$
727,397

Non-U.S. government and government agency
—

 
312,239

 
—

 
—

 
312,239

U.S. states, municipalities and political subdivisions
—

 
201,303

 
—

 
—

 
201,303

Agency residential mortgage-backed securities
—

 
978,049

 
—

 
—

 
978,049

Non-agency residential mortgage-backed securities
—

 
40,373

 
—

 
—

 
40,373

U.S. corporate
—

 
1,533,395

 
—

 
—

 
1,533,395

Non-U.S. corporate
—

 
422,249

 
—

 
—

 
422,249

Bank loans
—

 
232,886

 
210,065

 
—

 
442,951

Asset-backed securities
—

 
554,490

 
103,813

 
—

 
658,303

Commercial mortgage-backed securities
—

 
312,395

 
—

 
—

 
312,395

Total fixed maturities
—

 
5,314,776

 
313,878

 
—

 
5,628,654

Short-term investments
198,054

 
31,957

 
—

 
—

 
230,011

Other investments
 
 
 
 
 
 
 
 
 
Hedge funds
—

 
—

 
—

 
15,774

 
15,774

Private equity investments
—

 
—

 
—

 
78,407

 
78,407

Fixed income investment funds
—

 
13,351

 
17,404

 
173,671

 
204,426

Overseas deposits
—

 
—

 
—

 
56,611

 
56,611

Total other investments
—

 
13,351

 
17,404

 
324,463

 
355,218

Investments in investment affiliates (b)
—

 
—

 
—

 
—

 
100,137

Total managed investments
$
198,054

 
$
5,360,084

 
$
331,282

 
$
324,463

 
$
6,314,020

Non-managed investments
 
 
 
 
 
 
 
 
 
Catastrophe bonds
$
—

 
$
152,233

 
$
77,461

 
$
—

 
$
229,694

Short-term investments
3,151,746

 
—

 
—

 
—

 
3,151,746

Total non-managed investments
3,151,746

 
152,233

 
77,461

 
—

 
3,381,440

Total investments
$
3,349,800

 
$
5,512,317

 
$
408,743

 
$
324,463

 
$
9,695,460

(a)
In accordance with ASC Topic 820 “Fair Value Measurements,” investments measured at fair value using the net asset value (“NAV”) per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
(b)
In accordance with ASC Topic 825 “Financial Instruments,” the Company’s investments in investment affiliates have not been classified in the fair value hierarchy.



F-24
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



At December 31, 2016, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:
 
Level 1
 
Level 2
 
Level 3
 
Fair value based on NAV practical expedient (a)
 
Total
Managed investments
 
 
 
 
 
 
 
 
 
U.S. government and government agency
$
—

 
$
804,126

 
$
—

 
$
—

 
$
804,126

Non-U.S. government and government agency
—

 
240,791

 
—

 
—

 
240,791

U.S. states, municipalities and political subdivisions
—

 
271,830

 
—

 
—

 
271,830

Agency residential mortgage-backed securities
—

 
679,595

 
—

 
—

 
679,595

Non-agency residential mortgage-backed securities
—

 
15,477

 
—

 
—

 
15,477

U.S. corporate
—

 
1,534,508

 
—

 
—

 
1,534,508

Non-U.S. corporate
—

 
410,227

 
—

 
—

 
410,227

Bank loans
—

 
323,903

 
246,496

 
—

 
570,399

Asset-backed securities
—

 
502,883

 
23,931

 
—

 
526,814

Commercial mortgage-backed securities
—

 
330,932

 
—

 
—

 
330,932

Total fixed maturities
—

 
5,114,272

 
270,427

 
—

 
5,384,699

Short-term investments
209,651

 
18,735

 
—

 
—

 
228,386

Other investments
 
 
 
 
 
 
 
 
 
Fund of hedge funds
—

 
—

 
—

 
955

 
955

Hedge funds
—

 
—

 
—

 
17,381

 
17,381

Private equity investments
—

 
—

 
—

 
82,627

 
82,627

Fixed income investment funds
—

 
30,941

 
12,168

 
206,166

 
249,275

Overseas deposits
—

 
—

 
—

 
50,106

 
50,106

Mutual funds
—

 
5,368

 
—

 
—

 
5,368

Total other investments
—

 
36,309

 
12,168

 
357,235

 
405,712

Investments in investment affiliates (b)
—

 
—

 
—

 
—

 
100,431

Total managed investments
$
209,651

 
$
5,169,316

 
$
282,595

 
$
357,235

 
$
6,119,228

Non-managed investments
 
 
 
 
 
 
 
 
 
Catastrophe bonds
$
—

 
$
109,956

 
$
48,375

 
$
—

 
$
158,331

Short-term investments
2,567,784

 
—

 
—

 
—

 
2,567,784

Total non-managed investments
2,567,784

 
109,956

 
48,375

 
—

 
2,726,115

Total investments
$
2,777,435

 
$
5,279,272

 
$
330,970

 
$
357,235

 
$
8,845,343

(a)
In accordance with ASC Topic 820 “Fair Value Measurements,” investments measured at fair value using the net asset value (“NAV”) per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
(b)
In accordance with ASC Topic 825 “Financial Instruments,” the Company’s investments in investment affiliates have not been classified in the fair value hierarchy.
At December 31, 2017, managed Level 3 investments totaled $331,282 (December 31, 2016: $282,595), representing 5.2% (December 31, 2016: 4.6%) of total managed investments.

F-25
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



(b)
Valuation techniques
There have been no material changes in the Company’s valuation techniques during the period, or periods, represented by these Consolidated Financial Statements. The following methods and assumptions were used in estimating the fair value of each class of financial instrument recorded in the Consolidated Balance Sheets.
Fixed maturity investments
In general, valuation of the Company’s fixed maturity investment portfolio is provided by pricing services, such as index providers and pricing vendors, as well as broker quotations. The pricing vendors provide valuations for a high volume of liquid securities that are actively traded. For securities that do not trade on an exchange, the pricing services generally utilize market data and other observable inputs in matrix pricing models to determine month end prices. Prices are generally verified using third party data. Index providers generally utilize centralized trade reporting networks, available market makers and statistical techniques.
In general, broker-dealers value securities through their trading desks based on observable inputs. The methodologies include mapping securities based on trade data, bids or offers, observed spreads, and performance on newly issued securities. Broker-dealers also determine valuations by observing secondary trading of similar securities. Prices obtained from broker quotations are considered non-binding, however they are based on observable inputs and by observing secondary trading of similar securities obtained from active, non-distressed markets. The Company considers these Level 2 inputs as they are corroborated with other market observable inputs. The techniques generally used to determine the fair value of the Company’s fixed maturity investments are detailed below by asset class.
U.S. government and government agency
U.S. government and government agency securities consist primarily of debt securities issued by the U.S. Treasury and mortgage pass-through agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. Fixed maturity investments included in U.S. government and government agency securities are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources and integrate other observations from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The fair value of each security is individually computed using analytical models which incorporate option adjusted spreads and other daily interest rate data. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.
Non-U.S. government and government agency
Non-U.S. government and government agency securities consist of debt securities issued by non-U.S. governments and their agencies along with supranational organizations (also known as sovereign debt securities). Securities held in these sectors are primarily priced by pricing services who employ proprietary discounted cash flow models to value the securities. Key quantitative inputs for these models are daily observed benchmark curves for treasury, swap and high issuance credits. The pricing services then apply a credit spread for each security which is developed by in-depth and real time market analysis. For securities in which trade volume is low, the pricing services utilize data from more frequently traded securities with similar attributes. These models may also be supplemented by daily market and credit research for international markets. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.
U.S. states, municipalities and political subdivisions
The Company’s U.S. states, municipalities and political subdivisions portfolio contains debt securities issued by U.S. domiciled state and municipal entities. These securities are generally priced by independent pricing services using the techniques described for U.S. government and government agency securities described above. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.
Agency residential mortgage-backed securities
The Company’s agency residential mortgage-backed investments are primarily priced by pricing services using a mortgage pool specific model which utilizes daily inputs from the active to be announced market which is very liquid, as well as the U.S. treasury market. The model also utilizes additional information, such as the weighted average maturity, weighted average coupon and other available pool level data which is provided by the sponsoring agency. Valuations are also corroborated with daily active market quotes. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.

F-26
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



Non-agency residential mortgage-backed securities
The Company’s non-agency mortgage-backed investments include non-agency prime residential mortgage-backed fixed maturity investments. The Company has no fixed maturity investments classified as sub-prime held in its fixed maturity investments portfolio. Securities held in these sectors are primarily priced by pricing services using an option adjusted spread model or other relevant models, which principally utilize inputs including benchmark yields, available trade information or broker quotes, and issuer spreads. The pricing services also review collateral prepayment speeds, loss severity and delinquencies among other collateral performance indicators for the securities valuation, when applicable. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.
U.S. corporate
U.S. corporate debt securities consist primarily of investment-grade debt of a wide variety of U.S. corporate issuers and industries. The Company’s corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. In certain instances, securities are individually evaluated using a spread which is added to the U.S. treasury curve or a security specific swap curve as appropriate. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.
Non-U.S. corporate
Non-U.S. corporate debt securities consist primarily of investment-grade debt of a wide variety of non-U.S. corporate issuers and industries. The Company’s non-U.S. corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.
Bank loans
The Company’s bank loan investments consist primarily of below-investment-grade debt of a wide variety of corporate issuers and industries. The Company’s bank loans are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.
Also, included in the bank loan portfolio is a collection of loan participations held through an intermediary. A third party pricing service provides monthly valuation reports for each loan and participation using a combination of quotations from loan pricing services, leveraged loan indices or market price quotes obtained directly from the intermediary. Significant unobservable inputs used to price these securities include credit spreads and default rates; therefore, the fair value of these investments are classified as Level 3.
Asset-backed securities
Asset backed securities include mostly investment-grade debt securities backed by pools of loans with a variety of underlying collateral, including automobile loan receivables, student loans, credit card receivables, and collateralized loan obligations originated by a variety of financial institutions. Securities held in these sectors are primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services determine the expected cash flows for each security held in this sector using historical prepayment and default projections for the underlying collateral and current market data. In addition, a spread is applied to the relevant benchmark and used to discount the cash flows noted above to determine the fair value of the securities held in this sector. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2. Where pricing is unavailable

F-27
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



from pricing services, we obtain non-binding quotes from broker-dealers. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. Broker-dealer quotes for which significant observable inputs are unable to be corroborated with market observable information are classified as Level 3.
Commercial mortgage-backed securities
Commercial mortgage backed securities are investment-grade debt primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services determine the expected cash flows for each security held in this sector using historical prepayment and default projections for the underlying collateral and current market data. In addition, a spread is applied to the relevant benchmark and used to discount the cash flows noted above to determine the fair value of the securities held in this sector. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.
Catastrophe bonds
Catastrophe bonds are priced based on broker or underwriter bid indications. Level 2 catastrophe bonds are those traded over-the-counter; catastrophe bonds available only via private issuances are classified as Level 3.
Short-term investments
Short-term investments consist primarily of highly liquid securities, all with maturities of less than one year from the date of purchase. The fair value of the portfolio is generally determined using amortized cost which approximates fair value. As the highly liquid money market-type funds are actively traded, the fair value of these investments are classified as Level 1. To the extent that the remaining securities are not actively traded due to their approaching maturity, the fair value of these investments are classified as Level 2.
Other investments
Fund of hedge funds
During the year ended December 31, 2017, the Company’s investment in a fund of hedge funds was liquidated. Prior to liquidation, the fund’s administrator provided a monthly reported NAV with a three month delay in its valuation. The fund manager provided an estimate of the fund NAV at year end based on the estimated performance provided from the underlying funds. To determine the reasonableness of the estimated NAV, the Company compared the fund administrator’s NAV to the fund manager’s estimated NAV that incorporates relevant valuation sources. Prior to liquidation, the fair value of these investments were measured using the NAV practical expedient and therefore were not categorized within the fair value hierarchy.
Hedge funds
The hedge fund’s administrator provides quarterly NAVs with a three month delay in valuation. The fair value of this investment is measured using the NAV practical expedient and therefore has not been categorized within the fair value hierarchy.
Private equity investments
The private equity funds provide quarterly or semi-annual partnership capital statements with a three or six month delay which are used as a basis for valuation. These private equity investments vary in investment strategies and are not actively traded in any open markets. The fair value of these investments are measured using the NAV practical expedient and therefore have not been categorized within the fair value hierarchy.
Fixed income investment funds
The Company’s investment funds classified as Level 2 consist of a pooled investment fund. The pooled investment is invested in fixed income securities with high credit ratings and is only open to Lloyd’s Trust Fund participants. The fair value of units in the investment fund is based on the NAV of the fund and is traded on a daily basis.
Included in investment funds is a residual equity tranche of a structured credit fund valued using a dynamic yield that calculates an income accrual based on an underlying valuation model with a typical cash flow waterfall structure. Significant unobservable inputs used to price this fund include default rates and prepayment rates; therefore, the fair value of the investment fund is classified as Level 3.

F-28
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



The fair value of the Company’s remaining investment funds is based on the NAV of the fund as reported by the independent fund administrator. The fund’s administrators provide a monthly reported NAV with a one or three month delay in their valuation. The fair value of these investments are measured using the NAV practical expedient and therefore have not been categorized within the fair value hierarchy. None of these investments are probable of being sold at amounts different than their NAVs.
Overseas deposits
The Company’s share of a portfolio of Lloyd’s overseas deposits are managed centrally by Lloyd’s and invested according to local regulatory requirements. The composition of the portfolio varies and the deposits are made across the market. The fair value of the deposits is based on the portfolio level reporting that is provided by Lloyd’s. The fair value of these investments are measured using the NAV practical expedient and therefore have not been categorized within the fair value hierarchy.
Mutual funds
During the year ended December 31, 2017, the Company’s investment in a mutual fund was liquidated. Prior to liquidation, the mutual fund consisted of an investment fund which invested in various quoted investments. The fair value of units in the mutual fund was based on the NAV of the fund as reported by the fund manager. The mutual fund had daily liquidity which allowed us to redeem our holdings at the applicable NAV in the near term. As such, the Company had classified this investment as Level 2.
(c)
Level 3 investments
The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the years ended December 31, 2017 and 2016:
 
Year Ended December 31, 2017
 
Bank Loans
 
Catastrophe Bonds
 
Fixed Income Investment Funds
 
Asset Backed Securities
 
Total
Level 3 investments, beginning of year
$
246,496

 
$
48,375

 
$
12,168

 
$
23,931

 
$
330,970

Purchases
84,354

 
76,091

 
5,236

 
78,997

 
244,678

Sales
—

 
—

 
—

 
(195
)
 
(195
)
Settlements
(118,260
)
 
(48,375
)
 
—

 
—

 
(166,635
)
Realized gains
—

 
1,728

 
—

 
—

 
1,728

Change in net unrealized (losses) gains
(2,525
)
 
(358
)
 
—

 
1,080

 
(1,803
)
Level 3 investments, end of year
$
210,065

 
$
77,461

 
$
17,404

 
$
103,813

 
$
408,743

 
Year Ended December 31, 2016
 
Bank Loans
 
Catastrophe Bonds
 
Fixed Income Investment Funds
 
Asset Backed Securities
 
Total
Level 3 investments, beginning of year
$
232,337

 
$
13,500

 
$
—

 
$
—

 
$
245,837

Purchases
87,345

 
33,272

 
12,168

 
23,896

 
156,681

Sales
(2,389
)
 
—

 
—

 
—

 
(2,389
)
Settlements
(69,496
)
 
(125
)
 
—

 
—

 
(69,621
)
Change in net unrealized (losses) gains
(1,301
)
 
1,728

 
—

 
35

 
462

Level 3 investments, end of year
$
246,496

 
$
48,375

 
$
12,168

 
$
23,931

 
$
330,970

There were no transfers into or out of Level 3 during the years ended December 31, 2017 or 2016.

F-29
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



(d)
Financial instruments not carried at fair value
ASC Topic 825 “Financial Instruments” is also applicable to disclosures of financial instruments not carried at fair value, except for certain financial instruments, including insurance contracts and investments in affiliates. The carrying values of cash and cash equivalents, restricted cash, accrued investment income, other assets, net payable for investments purchased and accounts payable and accrued expenses approximated their fair values at December 31, 2017, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.
9. Variable interest entities
The Company consolidates all VIEs in which it is considered to be the primary beneficiary. The Company’s VIEs are primarily entities in the AlphaCat segment.
(a)
Consolidated VIEs
AlphaCat sidecars
Beginning on May 25, 2011, the Company joined with other investors in capitalizing a series of reinsurance and investment entities, referred to as “sidecars,” for the purpose of investing in collateralized reinsurance and retrocessional contracts. Certain of these sidecars deployed their capital through transactions entered into by AlphaCat Reinsurance Ltd. (“AlphaCat Re”). Each of these entities returns capital once the risk period expires and all losses have been paid out. The AlphaCat sidecars are VIEs and are consolidated by the Company. The Company’s maximum exposure to any of these sidecars is the amount of capital invested at any given time.
AlphaCat ILS funds
The AlphaCat ILS funds received third party subscriptions beginning on December 17, 2012. The Company and third party investors invest in the AlphaCat ILS funds for the purpose of investing in instruments with returns linked to property catastrophe reinsurance, retrocession and ILS contracts. The AlphaCat ILS funds have varying risk profiles and are categorized by the maximum permitted portfolio expected loss of the fund. The maximum permitted portfolio expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit. Lower risk ILS funds are defined as having a maximum permitted portfolio expected loss of less than 7%, whereas higher risk ILS funds have a maximum permitted portfolio expected loss of 7% or greater. The AlphaCat ILS funds primarily deploy their capital through transactions entered into by AlphaCat Re and AlphaCat Master Fund Ltd. (“AlphaCat Master Fund”). All of the AlphaCat ILS funds are VIEs and were consolidated by the Company through May 31, 2017. However, on June 1, 2017, the Company redeemed its investment in one of the lower risk AlphaCat ILS funds. As a result, the Company was no longer deemed to be the primary beneficiary and therefore this fund was deconsolidated effective June 1, 2017. The Company recognized a loss upon redemption of $402, which has been included in the Consolidated Statements of Comprehensive (Loss) Income within other insurance related income for the year ended December 31, 2017.
The Company’s maximum exposure to any of the funds is the amount of capital invested at any given time and any remaining capital commitments.
AlphaCat Re and AlphaCat Master Fund
The Company utilizes AlphaCat Re and AlphaCat Master Fund (collectively the “Master Funds”), both market facing entities, for the purpose of writing collateralized reinsurance and investing in capital markets products, respectively, on behalf of certain entities within the Asset Management segment and direct third party investors. AlphaCat Re enters into transactions on behalf of the AlphaCat sidecars and ILS funds (collectively the “Feeder Funds”) and direct third party investors, whereas AlphaCat Master Fund only enters into transactions on behalf of certain AlphaCat ILS funds. All of the risks and rewards of the underlying transactions are allocated to the Feeder Funds and direct third party investors using variable funding notes. The Master Funds are VIEs and are consolidated by the Company.
Notes Payable to AlphaCat Investors
The Master Funds issue variable funding notes to the Feeder Funds, and direct to third party investors, in order to write collateralized reinsurance and invest in capital markets products on their behalf. The Company’s investments in the Feeder Funds, together with investments made by third parties in the Feeder Funds and on a direct basis, are provided as consideration for the notes to the Master Funds. The duration of the underlying collateralized reinsurance contracts and capital market products is typically twelve months; however, the variable funding notes do not have a stated maturity date or principal amount since repayment

F-30
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



is dependent on the settlement and income or loss of the underlying transactions. Therefore, the notes are redeemed as the underlying transactions are settled. The income or loss generated by the underlying transactions is then transferred to the Feeder Funds and direct third party investors via the variable funding notes.
Any notes issued by the Master Funds to the consolidated Feeder Funds are eliminated on consolidation and only variable funding notes issued by AlphaCat Re directly to third party investors and non-consolidated Feeder Funds remain on the Consolidated Balance Sheets as notes payable to AlphaCat investors with the related income or loss included in the Consolidated Statements of Income and Comprehensive Income as loss (income) attributable to AlphaCat investors. To the extent that the income has not been returned to the investors, it is included in accounts payable and accrued expenses in the Consolidated Balance Sheets.
During 2017 and 2016, one of the AlphaCat ILS funds (the “Fund”) issued both common shares and structured notes to the Company and third party investors in order to capitalize the fund. The Fund deploys its capital through AlphaCat Re; therefore, the structured notes do not have a stated maturity date since repayment is dependent on the settlement and income or loss of the variable funding notes with AlphaCat Re. The structured notes rank senior to the common shares of the Fund and earn an interest rate of 7% (2016: 8%) per annum, payable on a cumulative basis in arrears.
As the Fund is consolidated by the Company, the structured notes issued to the Company are eliminated on consolidation and only the structured notes issued to third party investors remain on the Consolidated Balance Sheets as notes payable to AlphaCat investors, with any related interest included in the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income as loss (income) attributable to AlphaCat investors. To the extent that the accrued interest on the structured notes has not been returned to the investors, it is included in accounts payable and accrued expenses in the Consolidated Balance Sheets.
The following tables present reconciliations of the beginning and ending notes payable to AlphaCat investors during the years ended December 31, 2017 and 2016:
 
Year Ended December 31, 2017
 
Variable Funding Notes
 
Structured Notes
 
Total
Notes payable to AlphaCat investors, beginning of year
$
278,202

 
$
—

 
$
278,202

Notes payable to AlphaCat investors recognized on deconsolidation of AlphaCat ILS fund
423,269

 
—

 
423,269

Issuance of notes payable to AlphaCat investors
601,913

 
172,200

 
774,113

Redemption of notes payable to AlphaCat investors
(367,733
)
 
—

 
(367,733
)
Foreign exchange losses
513

 
—

 
513

Notes payable to AlphaCat investors, end of year
$
936,164

 
$
172,200

 
$
1,108,364

 
 
 
 
 
 
 
Year Ended December 31, 2016
 
Variable Funding Notes
 
Structured Notes
 
Total
Notes payable to AlphaCat investors, beginning of year
$
75,493

 
$
—

 
$
75,493

Issuance of notes payable to AlphaCat investors
311,711

 
94,326

 
406,037

Redemption of notes payable to AlphaCat investors
(109,712
)
 
(94,326
)
 
(204,038
)
Foreign exchange losses
710

 
—

 
710

Notes payable to AlphaCat investors, end of year
$
278,202

 
$
—

 
$
278,202

As at December 31, 2016, $1,000 of the structured notes redeemed were payable to AlphaCat investors and included in accounts payable and accrued expenses.
The loss attributable to AlphaCat investors for the year ended December 31, 2017 was $16,929 (2016: income of $23,358). As at December 31, 2017, amounts due to AlphaCat investors totaling $18,054 (December 31, 2016: $17,068) were included in accounts payable and accrued expenses.     

F-31
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



BetaCat ILS funds
The BetaCat ILS funds follow a passive buy-and-hold investment strategy, investing exclusively in catastrophe bonds (principal-at-risk variable rate notes and other event-linked securities, referred to collectively as “Cat Bonds”) focused on property and casualty risks and issued under Rule 144A of the Securities Act of 1933, as amended. Two of the three BetaCat ILS funds are VIEs, one of which is consolidated by the Company. The remaining fund is a VOE and is consolidated by the Company as it owns all of the voting equity interests. The Company’s maximum exposure to any of the funds is the amount of capital invested at any given time.
The following table presents the total assets and total liabilities of the Company’s consolidated VIEs, excluding intercompany eliminations, as at December 31, 2017 and 2016:
 
December 31, 2017
 
December 31, 2016
 
Total Assets
 
Total Liabilities
 
Total Assets
 
Total Liabilities
AlphaCat sidecars
$
25,975

 
$
3,267

 
$
40,041

 
$
3,206

AlphaCat ILS funds - Lower Risk
1,107,503

 
259,630

 
1,498,276

 
42,457

AlphaCat ILS funds - Higher Risk
1,310,071

 
912,341

 
972,633

 
381,332

AlphaCat Re and AlphaCat Master Fund
3,398,082

 
3,397,912

 
2,510,415

 
2,510,245

BetaCat ILS funds
77,221

 
261

 
82,471

 
30,663

Assets of consolidated VIEs can only be used to settle obligations and liabilities of the consolidated VIEs and do not have recourse to the general credit of the Company. Investments held by these entities are presented separately in Note 7, “Investments,” as non-managed investments.
(a)
Non-Consolidated VIEs
The Company invests in private equity and other investment vehicles as part of the Company’s investment portfolio. The activities of these VIEs are generally limited to holding investments and the Company’s involvement in these entities is passive in nature. The Company’s maximum exposure to the VIEs is the amount of capital invested at any given time, and the Company does not have the power to direct the activities which most significantly impact the VIEs economic performance. The Company is therefore not the primary beneficiary of these VIEs. See Note 7, “Investments,” for further details.

F-32
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



10. Noncontrolling interests
Investors in certain of the AlphaCat and BetaCat ILS funds have rights that enable them, subject to certain limitations, to redeem their shares. Such investments held by third parties are therefore recorded in the Company’s Consolidated Balance Sheets as redeemable noncontrolling interests, a mezzanine item between liabilities and shareholders’ equity. If and when a redemption notice is received, the fair value of the redemption is reclassified to accounts payable and accrued expenses.
The AlphaCat sidecars and one of the AlphaCat ILS funds have no shareholder redemption rights. Therefore, the third party equity is recorded in the Company’s Consolidated Balance Sheets as noncontrolling interests.
The following tables present a reconciliation of the beginning and ending balances of redeemable noncontrolling interests and noncontrolling interests for the years ended December 31, 2017 and 2016:
 
Redeemable
Noncontrolling Interests
 
Noncontrolling Interests
 
Total
 
Years Ended December 31,
 
Years Ended December 31,
 
Years Ended December 31,
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Balance, beginning of year
$
1,528,001

 
$
1,111,714

 
$
165,977

 
$
154,662

 
$
1,693,978

 
$
1,266,376

Issuance of shares
397,200

 
393,450

 
258,300

 
171,674

 
655,500

 
565,124

Adjustment to noncontrolling interests as a result of deconsolidation
(459,021
)
 
—

 
—

 
—

 
(459,021
)
 
—

(Loss) income attributable to noncontrolling interests
(94,644
)
 
100,852

 
(262,636
)
 
22,511

 
(357,280
)
 
123,363

Redemption of shares / Distributions
(367,442
)
 
(78,015
)
 
(144,923
)
 
(182,870
)
 
(512,365
)
 
(260,885
)
Balance, end of year
$
1,004,094

 
$
1,528,001

 
$
16,718

 
$
165,977

 
$
1,020,812

 
$
1,693,978

As at December 31, 2017, redemptions of $180,104 and distributions of $nil (December 31, 2016: $71,530 and $16,144) were payable to redeemable noncontrolling interests and noncontrolling interests, respectively. These amounts are classified within accounts payable and accrued expenses in the Company’s Consolidated Balance Sheets.

F-33
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



11. Derivative instruments
(a)
Derivatives not designated as hedging instruments
The following tables summarize information on the classification and amount of the fair value of derivatives not designated as hedging instruments within the Company’s Consolidated Balance Sheets as at December 31, 2017 and 2016:
 
 
December 31, 2017
 
December 31, 2016
Derivatives not designated as hedging instruments
 
Notional Exposure
 
Asset Derivative at Fair Value (a)
 
Liability Derivative at Fair Value (a)
 
Notional Exposure
 
Asset Derivative at Fair Value (a)
 
Liability Derivative at Fair Value (a)
Foreign currency forward contracts
 
$
283,765

 
$
1,147

 
$
906

 
$
181,375

 
$
2,351

 
$
3,421

Interest rate swap contracts
 
$
200,000

 
$
1,589

 
$
—

 
$
—

 
$
—

 
$
—

Weather derivative contracts
 
$
4,825

 
$
853

 
$
—

 
$
—

 
$
—

 
$
—

(a)
Asset and liability derivatives are classified within other assets and accounts payable and accrued expenses, respectively, within the Company’s Consolidated Balance Sheets.
The foreign currency forward contracts and interest rate swap contracts are valued on the basis of standard industry valuation models. The inputs to these models are based on observable market inputs, and as such the fair values of these contracts are classified as Level 2. The weather derivative contracts are valued on the basis of modeled and other information provided by Validus’ counterparties. Validus reviews this information, which represents Level 3 inputs, as it is ultimately management’s responsibility to ensure that the fair values reflected in the Company’s financial statements are appropriate.
The following table summarizes information on the classification and net impact on earnings, recognized in the Company’s Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income relating to derivatives that were not designated as hedging instruments during the years ended December 31, 2017, 2016 and 2015:
Derivatives not designated as hedging instruments
 
Classification of gains (losses) recognized in earnings
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
Foreign currency forward contracts
 
Foreign exchange (losses) gains
 
$
(8,571
)
 
$
(1,667
)
 
$
(610
)
Foreign currency forward contracts
 
Other insurance related income and other income
 
$
(979
)
 
$
142

 
$
139

Interest rate swap contracts (a)
 
Net realized gains on investments
 
$
989

 
$
8,518

 
$
—

Weather derivative contracts
 
Other insurance related income and other income
 
$
1,299

 
$
—

 
$
—

(a)
Net realized gains during the year ended December 31, 2016 relate to net realized gains on two interest rate swap contracts which were entered into and terminated during that year to partially offset the impact of interest rate increases on the Company’s fixed maturity investment portfolio.
(b)
Derivatives designated as hedging instruments
Derivative instruments designated as fair value hedges
Up to September 30, 2015, the Company had designated certain foreign currency derivative instruments as fair value hedges. During the year ended December 31, 2015, the Company incurred losses of $12,279 recognized in income within foreign exchange gains (losses), with an equal and offsetting gain recognized in the same account on the hedged item.
Derivative instruments designated as cash flow hedges
During 2012 and 2013, the Company entered into several swap agreements with third parties in order to convert the floating interest rates associated with its Junior Subordinated Deferrable Debentures into fixed rates. See Note 19, “Debt and financing arrangements,” for further details. The Company also designates certain foreign exchange contracts as cash flow hedges of anticipated foreign currency-denominated sales or purchases.

F-34
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



The following table summarizes information on the classification and amount of the fair value of derivatives designated as hedging instruments on the Consolidated Balance Sheets as at December 31, 2017 and 2016:
 
 
December 31, 2017
 
December 31, 2016
Derivatives designated as hedging instruments
 
Notional Exposure
 
Asset Derivative at Fair Value (a)
 
Liability Derivative at Fair Value (a)
 
Notional Exposure
 
Asset Derivative at Fair Value (a)
 
Liability Derivative at Fair Value (a)
Interest rate swap contracts
 
$
552,263

 
$
9,806

 
$
18,840

 
$
552,263

 
$
20

 
$
1,479

Foreign currency forward contracts
 
$
96,293

 
$
1,891

 
$
—

 
$
—

 
$
—

 
$
—

(a)
Asset and liability derivatives are classified within other assets and accounts payable and accrued expenses, respectively, within the Company’s Consolidated Balance Sheets.
The interest rate swap contracts and foreign currency forward contracts are valued on the basis of Level 2 inputs.
The following tables provide the total impact on other comprehensive (loss) income and earnings relating to the derivative instruments formally designated as cash flow hedges for the years ended December 31, 2017, 2016 and 2015:
 
 
Years Ended December 31,
Interest rate swap contracts
 
2017
 
2016
 
2015
Amount of effective portion recognized in other comprehensive (loss)
 
$
(8,243
)
 
$
277

 
$
(841
)
Amount of effective portion reclassified to finance expenses
 
$
(450
)
 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
Years Ended December 31,
Foreign currency forward contracts
 
2017
 
2016
 
2015
Amount of effective portion recognized in other comprehensive income
 
$
1,891

 
$
—

 
$
—

Amount of effective portion reclassified to general and administrative expenses
 
$
—

 
$
—

 
$
—

(c)
Balance sheet offsetting
There was no balance sheet offsetting activity as at December 31, 2017 or 2016.
The Company provides investments as collateral for interest rate swap contracts and weather derivative contracts. The Company does not provide collateral or financial instruments as security for foreign currency forward contracts. Our derivative instruments are generally traded under International Swaps and Derivatives Association master agreements, which establish terms that apply to all transactions. On a periodic basis, the amounts receivable from or payable to the counterparties are settled in cash.
The Company has not elected to settle multiple transactions with an individual counterparty on a net basis.

F-35
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



12. Premiums receivable
Premiums receivable are composed of premiums in the course of collection, net of commissions and brokerage, and premiums accrued but unbilled, net of commissions and brokerage. It is common practice in the (re)insurance industry for premiums to be paid on an installment basis, therefore significant amounts will be considered unbilled and will not become due until a future date, which is typically no later than expiration of the underlying coverage period. The following is a breakdown of the components of premiums receivable at December 31, 2017 and 2016:
 
Year Ended December 31, 2017
 
Premiums
in course
of collection
 
Premiums
accrued
but unbilled
 
Total
Premiums receivable, beginning of year
$
101,402

 
$
623,988

 
$
725,390

Change during year
143,760

 
70,337

 
214,097

Premiums receivable, end of year
$
245,162

 
$
694,325

 
$
939,487

 
Year Ended December 31, 2016
 
Premiums
in course
of collection
 
Premiums
accrued
but unbilled
 
Total
Premiums receivable, beginning of year
$
95,152

 
$
563,530

 
$
658,682

Change during year
6,250

 
60,458

 
66,708

Premiums receivable, end of year
$
101,402

 
$
623,988

 
$
725,390


F-36
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



13. Reserve for losses and loss expenses
The following table summarizes the Company’s reserve for losses and loss expenses as at December 31, 2017 and 2016:
 
December 31, 2017
 
December 31, 2016
Case reserves
$
1,753,844

 
$
1,237,772

IBNR
3,077,546

 
1,757,423

Reserve for losses and loss expenses
$
4,831,390

 
$
2,995,195

The following table represents an analysis of paid and unpaid losses and loss expenses incurred and a reconciliation of the beginning and ending unpaid losses and loss expenses for the years ended December 31, 2017, 2016 and 2015:
 
Years Ended December 31,
 
2017
 
2016
 
2015
Reserve for losses and loss expenses, beginning of year
$
2,995,195

 
$
2,996,567

 
$
3,243,147

Loss reserves recoverable
(430,421
)
 
(350,586
)
 
(377,466
)
Net reserves for losses and loss expenses, beginning of year
2,564,774

 
2,645,981

 
2,865,681

 
 
 
 
 
 
Net reserves acquired (a)
23,753

 
—

 
—

 
 
 
 
 
 
Increase (decrease) in net reserves for losses and loss expenses in respect of losses occurring in:
Current year
2,522,711

 
1,281,289

 
1,283,970

Prior years (b)
(222,533
)
 
(216,192
)
 
(306,137
)
Total incurred losses and loss expenses (b)
2,300,178

 
1,065,097

 
977,833

 
 
 
 
 
 
Foreign exchange loss (gain)
49,117

 
(31,902
)
 
(29,694
)
Less net losses and loss expenses paid in respect of losses occurring in:
 
 
 
 
 
Current year
(600,877
)
 
(389,234
)
 
(326,167
)
Prior years
(739,552
)
 
(725,168
)
 
(841,672
)
Total net paid losses
(1,340,429
)
 
(1,114,402
)
 
(1,167,839
)
 
 
 
 
 
 
Net reserve for losses and loss expenses, end of year
3,597,393

 
2,564,774

 
2,645,981

Loss reserves recoverable
1,233,997

 
430,421

 
350,586

Reserve for losses and loss expenses, end of year
$
4,831,390

 
$
2,995,195

 
$
2,996,567

(a)
Equals net reserves acquired of $42,575 less net reserves commuted at closing of $18,822.
(b)
Upon closing the acquisition of Western World, an adjustment of $15,586 was made to increase net reserves to reflect fair value. This adjustment was fully amortized to income through a reduction in losses and loss expenses of $10,979 and $4,607 during the years ended December 31, 2015 and 2014, respectively.
Incurred losses and loss expenses comprise:
 
Years Ended December 31,
 
2017
 
2016
 
2015
Gross losses and loss expenses (a)
$
3,428,451

 
$
1,244,539

 
$
1,065,738

Reinsurance recoveries
(1,128,273
)
 
(179,442
)
 
(87,905
)
Net incurred losses and loss expenses (a)
$
2,300,178

 
$
1,065,097

 
$
977,833

(a)
Upon closing the acquisition of Western World, an adjustment of $15,586 was made to increase net reserves to reflect fair value. This adjustment was fully amortized to income through a reduction in losses and loss expenses of $10,979 and $4,607 during the years ended December 31, 2015 and 2014, respectively.

F-37
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



The net (favorable) adverse development on prior accident years by segment and line of business for the years ended December 31, 2017, 2016 and 2015 was as follows:
 
Year Ended December 31, 2017
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
Reinsurance Segment
$
(34,063
)
 
$
(76,620
)
 
$
(2,619
)
 
$
(113,302
)
Insurance Segment
(26,202
)
 
(29,721
)
 
(40,769
)
 
(96,692
)
Asset Management Segment
(10,653
)
 
(1,886
)
 
—

 
(12,539
)
Net favorable development
$
(70,918
)
 
$
(108,227
)
 
$
(43,388
)
 
$
(222,533
)
 
Year Ended December 31, 2016
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
Reinsurance Segment
$
(61,102
)
 
$
(70,439
)
 
$
(4,085
)
 
$
(135,626
)
Insurance Segment
(37,855
)
 
5,801

 
(45,775
)
 
(77,829
)
Asset Management Segment
(1,858
)
 
(879
)
 
—

 
(2,737
)
Net favorable development
$
(100,815
)
 
$
(65,517
)
 
$
(49,860
)
 
$
(216,192
)
 
Year Ended December 31, 2015
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
Reinsurance Segment
$
(71,150
)
 
$
(65,193
)
 
$
(1,052
)
 
$
(137,395
)
Insurance Segment
(57,631
)
 
(51,011
)
 
(51,903
)
 
(160,545
)
Asset Management Segment
(8,197
)
 
—

 
—

 
(8,197
)
Net favorable development
$
(136,978
)
 
$
(116,204
)
 
$
(52,955
)
 
$
(306,137
)
The net favorable development on prior accident years for the years ended December 31, 2017, 2016 and 2015 was primarily driven by favorable development on attritional losses.
Short Duration Contract Disclosures
The Company has disaggregated its information presented in the tables below by line of business as appropriate for each of the Reinsurance and Insurance segments, and on a total basis for the Asset Management segment. The Company has presented the below development tables for all accident years shown using exchange rates as at December 31, 2017. All accident years prior to the current year have been restated and presented using the current year exchange rate.
(a)
Loss Development Tables
(i)
Reinsurance Segment
The Reinsurance segment loss development tables have been produced by line of business for accident years 2012 through to 2017. The Company determined that it was impracticable to produce IBNR by accident year by lines of business for years prior to 2012 as the necessary data in original currency was not readily available. In addition, the Reinsurance segment provides treaty reinsurance products on a global basis for all of its lines of business and does not receive or maintain claims count information associated with its reserved claims. As such, the Company has determined that it is impracticable to provide this information.
The net reserves for losses and loss expenses related to the acquisitions of IPC Holdings Ltd. (“IPC”), acquired on September 4, 2009, and Flagstone Reinsurance Holdings, S.A. (“Flagstone”), acquired on November 30, 2012, have been incorporated in the Reinsurance segment’s reserves for losses and loss expenses on a prospective basis. IPC and Flagstone were put into run-off as at the acquisition date of each. The prospective treatment for the acquisition of Flagstone was adopted primarily as a result of the data necessary to produce the loss development tables by accident year and by lines of business not being migrated over on acquisition as it was not requested or received and as a result does not exist within the Company’s data systems.

F-38
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



Reinsurance: Property
 
 
 
 
 
 
 
 
 
 
 
Incurred Losses and Loss Expenses, Net of Reinsurance
 
 
 
 
 
 
Years Ended December 31,
 
December 31, 2017
Accident Year
 
2012
2013
2014
2015
2016
2017
 
Total of IBNR Reserves Plus Expected Development on Reported Losses
 
Cumulative Reported Claims Count
 
 
<--------------------------------- Unaudited---------------------------------->
 
 
 
 
 
2012
 
$
407,180

$
324,527

$
309,364

$
282,470

$
281,746

$
280,121

 
$
22,507

 
n/a
2013
 
 
188,055

167,604

152,818

144,770

139,608

 
2,781

 
n/a
2014
 
 
 
112,063

105,415

98,501

99,497

 
4,846

 
n/a
2015
 
 
 
 
165,991

123,742

103,800

 
16,882

 
n/a
2016
 
 
 
 
 
164,354

170,224

 
49,006

 
n/a
2017
 
 
 
 
 
 
397,297

 
130,143

 
n/a
 
 
 
 
 
 
Total

$
1,190,547

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative Paid Losses and Loss Expenses, Net of Reinsurance
 
 
 
 
 
 
Years Ended December 31,
 
 
 
 
Accident Year
 
2012
2013
2014
2015
2016
2017
 
 
 
 
 
 
<--------------------------------- Unaudited---------------------------------->
 
 
 
 
 
2012
 
$
63,194

$
147,482

$
199,042

$
223,090

$
232,064

$
237,388

 
 
 
 
2013
 
 
18,759

70,626

110,674

125,275

130,647

 
 
 
 
2014
 
 
 
26,747

65,090

80,758

88,218

 
 
 
 
2015
 
 
 
 
16,550

59,918

75,816

 
 
 
 
2016
 
 
 
 
 
28,964

87,994

 
 
 
 
2017
 
 
 
 
 
 
132,834

 
 
 
 
 
 
 
 
 
 
Total

$
752,897

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserves for losses and loss expenses, before 2012, net of reinsurance (a)
 
$
121,553

 
 
 
 
 
 
Reserves for losses and loss expenses, net of reinsurance
 
$
559,203

 
 
 
 
(a)
Includes reserves for losses and loss expense, net of reinsurance, of $63,115 and $8,854 related to Flagstone and IPC, respectively.


F-39
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



Reinsurance: Specialty - Short-tail
 
 
 
 
 
 
 
 
 
 
Incurred Losses and Loss Expenses, Net of Reinsurance
 
 
 
 
 
 
Years Ended December 31,
 
December 31, 2017
Accident Year
 
2012
2013
2014
2015
2016
2017
 
Total of IBNR Reserves Plus Expected Development on Reported Losses
 
Cumulative Reported Claims Count
 
 
<--------------------------------- Unaudited---------------------------------->
 
 
 
 
 
2012
 
$
291,994

$
331,981

$
328,335

$
319,383

$
317,712

$
315,945

 
$
17,164

 
n/a
2013
 
 
286,039

287,242

264,924

257,830

257,182

 
5,379

 
n/a
2014
 
 
 
308,367

282,335

263,694

257,924

 
9,977

 
n/a
2015
 
 
 
 
435,268

402,576

376,725

 
35,616

 
n/a
2016
 
 
 
 
 
351,892

310,764

 
51,550

 
n/a
2017
 
 
 
 
 
 
333,363

 
163,782

 
n/a
 
 
 
 
 
 
Total

$
1,851,903

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative Paid Losses and Loss Expenses, Net of Reinsurance
 
 
 
 
 
 
Years Ended December 31,
 
 
 
 
Accident Year
 
2012
2013
2014
2015
2016
2017
 
 
 
 
 
 
<--------------------------------- Unaudited---------------------------------->
 
 
 
 
 
2012
 
$
37,164

$
165,173

$
233,706

$
258,564

$
269,810

$
280,165

 
 
 
 
2013
 
 
116,816

197,890

217,572

227,864

241,187

 
 
 
 
2014
 
 
 
107,781

187,695

209,085

215,473

 
 
 
 
2015
 
 
 
 
187,046

261,463

315,738

 
 
 
 
2016
 
 
 
 
 
158,649

219,688

 
 
 
 
2017
 
 
 
 
 
 
98,898

 
 
 
 
 
 
 
 
 
 
Total

$
1,371,149

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserves for losses and loss expenses, before 2012, net of reinsurance (a)
 
$
108,283

 
 
 
 
 
 
Reserves for losses and loss expenses, net of reinsurance
 
$
589,037

 
 
 
 
(a)
Includes reserves for losses and loss expense, net of reinsurance, of $39,416 and $6,686 related to Flagstone and IPC, respectively.


F-40
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



Reinsurance: Specialty - Other
 
 
 
 
 
 
 
 
 
 
Incurred Losses and Loss Expenses, Net of Reinsurance
 
 
 
 
 
 
Years Ended December 31,
 
December 31, 2017
Accident Year
 
2012
2013
2014
2015
2016
2017
 
Total of IBNR Reserves Plus Expected Development on Reported Losses
 
Cumulative Reported Claims Count
 
 
<--------------------------------- Unaudited---------------------------------->
 
 
 
 
 
2012
 
$
6,650

$
6,431

$
4,026

$
2,425

$
1,976

$
2,180

 
$
231

 
n/a
2013
 
 
4,033

3,043

1,587

284

54

 
—

 
n/a
2014
 
 
 
3,596

3,298

1,797

672

 
597

 
n/a
2015
 
 
 
 
6,160

7,155

2,669

 
1,973

 
n/a
2016
 
 
 
 
 
28,694

33,237

 
29,717

 
n/a
2017
 
 
 
 
 
 
72,626

 
67,390

 
n/a
 
 
 
 
 
 
Total

$
111,438

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative Paid Losses and Loss Expenses, Net of Reinsurance
 
 
 
 
 
 
Years Ended December 31,
 
 
 
 
Accident Year
 
2012
2013
2014
2015
2016
2017
 
 
 
 
 
 
<--------------------------------- Unaudited---------------------------------->
 
 
 
 
 
2012
 
$
482

$
1,582

$
1,868

$
1,937

$
1,925

$
1,925

 
 
 
 
2013
 
 
—

54

54

54

54

 
 
 
 
2014
 
 
 
—

2

11

60

 
 
 
 
2015
 
 
 
 
21

148

610

 
 
 
 
2016
 
 
 
 
 
316

2,032

 
 
 
 
2017
 
 
 
 
 
 
1,144

 
 
 
 
 
 
 
 
 
 
Total

$
5,825

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserves for losses and loss expenses, before 2012, net of reinsurance (a)
 
$
6,168

 
 
 
 
 
 
Reserves for losses and loss expenses, net of reinsurance
 
$
111,781

 
 
 
 
(a)
Includes reserves for losses and loss expense, net of reinsurance, of $6,021 and $98 related to Flagstone and IPC, respectively.


F-41
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



(ii)
Insurance Segment
The Insurance segment loss development tables have been produced by line of business for accident years 2012 through to 2017. The Company determined that it was impracticable to produce IBNR by accident year for years prior to 2012 as the Company did not record this data for years prior to 2012 and as such, did not allocate IBNR by line of business for these years.
On May 1, 2017, the Company acquired $23,753 of net loss and loss expense reserves in connection with the CRS acquisition. All of these net reserves acquired, as well as losses and loss expenses incurred and paid by CRS subsequent to the acquisition and reflected in the tables below, were incurred during accident year 2017.
Insurance: Property
 
 
 
 
 
 
 
 
 
 
 
Incurred Losses and Loss Expenses, Net of Reinsurance
 
 
 
 
 
 
Years Ended December 31,
 
December 31, 2017
Accident Year
 
2012
2013
2014
2015
2016
2017
 
Total of IBNR Reserves Plus Expected Development on Reported Losses
 
Cumulative Reported Claims Count
 
 
<--------------------------------- Unaudited---------------------------------->
 
 
 
 
 
2012
 
$
145,215

$
128,981

$
119,683

$
120,251

$
118,352

$
118,617

 
$
373

 
4,239
2013
 
 
135,281

118,677

105,265

101,754

102,157

 
28

 
4,795
2014
 
 
 
184,006

151,689

144,500

140,322

 
2,504

 
6,479
2015
 
 
 
 
161,385

135,555

129,313

 
2,947

 
7,108
2016
 
 
 
 
 
219,257

203,944

 
23,729

 
7,901
2017
 
 
 
 
 
 
336,802

 
124,680

 
9,012
 
 
 
 
 
 
Total

$
1,031,155

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative Paid Losses and Loss Expenses, Net of Reinsurance
 
 
 
 
 
 
Years Ended December 31,
 
 
 
 
Accident Year
 
2012
2013
2014
2015
2016
2017
 
 
 
 
 
 
<--------------------------------- Unaudited---------------------------------->
 
 
 
 
 
2012
 
$
28,191

$
80,367

$
105,195

$
109,095

$
113,462

$
114,602

 
 
 
 
2013
 
 
28,127

69,137

88,226

94,052

97,137

 
 
 
 
2014
 
 
 
42,486

102,454

124,696

130,772

 
 
 
 
2015
 
 
 
 
43,006

88,872

111,506

 
 
 
 
2016
 
 
 
 
 
66,026

133,470

 
 
 
 
2017
 
 
 
 
 
 
116,316

 
 
 
 
 
 
 
 
 
 
Total

$
703,803

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserves for losses and loss expenses, before 2012, net of reinsurance
 
$
7,526

 
 
 
 
 
 
Reserves for losses and loss expenses, net of reinsurance
 
$
334,878

 
 
 
 

F-42
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



Insurance: Specialty - Short-tail
 
 
 
 
 
 
 
 
 
 
Incurred Losses and Loss Expenses, Net of Reinsurance
 
 
 
 
 
 
Years Ended December 31,
 
December 31, 2017
Accident Year
 
2012
2013
2014
2015
2016
2017
 
Total of IBNR Reserves Plus Expected Development on Reported Losses
 
Cumulative Reported Claims Count
 
 
<--------------------------------- Unaudited---------------------------------->
 
 
 
 
 
2012
 
$
218,215

$
208,861

$
195,703

$
188,576

$
184,859

$
185,980

 
$
613

 
6,258
2013
 
 
231,549

239,572

222,945

217,896

211,300

 
5,335

 
7,044
2014
 
 
 
225,911

206,367

200,359

193,384

 
8,673

 
7,744
2015
 
 
 
 
215,631

236,320

226,374

 
32,307

 
8,045
2016
 
 
 
 
 
195,575

188,810

 
26,288

 
7,991
2017
 
 
 
 
 
 
426,295

 
195,343

 
36,335
 
 
 
 
 
 
Total

$
1,432,143

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative Paid Losses and Loss Expenses, Net of Reinsurance
 
 
 
 
 
 
Years Ended December 31,
 
 
 
 
Accident Year
 
2012
2013
2014
2015
2016
2017
 
 
 
 
 
 
<--------------------------------- Unaudited---------------------------------->
 
 
 
 
 
2012
 
$
44,883

$
113,840

$
149,950

$
163,075

$
167,806

$
178,652

 
 
 
 
2013
 
 
73,517

143,772

173,020

183,879

188,486

 
 
 
 
2014
 
 
 
53,965

128,052

158,808

168,642

 
 
 
 
2015
 
 
 
 
50,740

118,707

161,130

 
 
 
 
2016
 
 
 
 
 
61,049

122,103

 
 
 
 
2017
 
 
 
 
 
 
182,644

 
 
 
 
 
 
 
 
 
 
Total

$
1,001,657

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserves for losses and loss expenses, before 2012, net of reinsurance
 
$
30,996

 
 
 
 
 
 
Reserves for losses and loss expenses, net of reinsurance (a)
 
$
461,482

 
 
 
 
(a)
The 2017 accident year includes incurred losses and loss expenses, and cumulative paid losses and loss expenses, net of reinsurance, of $226,190 and $122,088, respectively, related to CRS.


F-43
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



Insurance: Specialty - Other
 
 
 
 
 
 
 
 
 
 
 
Incurred Losses and Loss Expenses, Net of Reinsurance
 
 
 
 
 
 
Years Ended December 31,
 
December 31, 2017
Accident Year
 
2012
2013
2014
2015
2016
2017
 
Total of IBNR Reserves Plus Expected Development on Reported Losses
 
Cumulative Reported Claims Count
 
 
<--------------------------------- Unaudited---------------------------------->
 
 
 
 
 
2012
 
$
209,614

$
190,816

$
200,265

$
201,410

$
193,952

$
190,640

 
$
1,043

 
7,036
2013
 
 
231,049

240,827

224,161

209,513

206,462

 
12,649

 
8,838
2014
 
 
 
338,578

332,985

332,878

336,921

 
50,322

 
10,593
2015
 
 
 
 
270,732

261,192

259,218

 
68,779

 
8,991
2016
 
 
 
 
 
253,825

227,372

 
122,828

 
7,188
2017
 
 
 
 
 
 
280,105

 
232,409

 
4,926
 
 
 
 
 
 
Total

$
1,500,718

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative Paid Losses and Loss Expenses, Net of Reinsurance
 
 
 
 
 
 
Years Ended December 31,
 
 
 
 
Accident Year
 
2012
2013
2014
2015
2016
2017
 
 
 
 
 
 
<--------------------------------- Unaudited---------------------------------->
 
 
 
 
 
2012
 
$
20,591

$
56,035

$
100,259

$
133,198

$
164,488

$
175,012

 
 
 
 
2013
 
 
13,538

55,779

99,429

137,739

166,969

 
 
 
 
2014
 
 
 
24,091

96,178

166,637

214,970

 
 
 
 
2015
 
 
 
 
18,363

74,179

125,011

 
 
 
 
2016
 
 
 
 
 
17,557

50,831

 
 
 
 
2017
 
 
 
 
 
 
15,053

 
 
 
 
 
 
 
 
 
 
Total

$
747,846

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserves for losses and loss expenses, before 2012, net of reinsurance
 
$
58,209

 
 
 
 
 
 
Reserves for losses and loss expenses, net of reinsurance
 
$
811,081

 
 
 
 

F-44
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



(iii)
Asset Management Segment
The Asset Management segment loss development tables have been produced in total below. The Company does not receive or maintain claims count information associated with its reserved claims for the Asset Management segment. As such, the Company has determined that it is impracticable to provide this information.
Asset Management
 
 
 
 
 
 
 
 
 
 
 
Incurred Losses and Loss Expenses, Net of Reinsurance
 
 
 
 
 
 
Years Ended December 31,
 
December 31, 2017
Accident Year
 
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
 
Total of IBNR Reserves Plus Expected Development on Reported Losses
 
Cumulative Reported Claims Count
 
 
<----------------------------------------------- Unaudited ------------------------------------------------>
 
 
 
 
 
2008
 
$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—

 
$
—

 
n/a
2009
 
 
—

—

—

—

—

—

—

—

—

 
—

 
n/a
2010
 
 
 
—

—

—

—

—

—

—

—

 
—

 
n/a
2011
 
 
 
 
10,000

10,000

10,000

10,000

10,000

10,000

10,000

 
—

 
n/a
2012
 
 
 
 
 
36,031

15,710

12,151

7,200

7,000

7,191

 
—

 
n/a
2013
 
 
 
 
 
 
17,432

5,225

2,752

2,179

1,759

 
3

 
n/a
2014
 
 
 
 
 
 
 
2,287

1,350

1,200

1,139

 
201

 
n/a
2015
 
 
 
 
 
 
 
 
8,743

6,948

4,578

 
1,962

 
n/a
2016
 
 
 
 
 
 
 
 
 
48,321

38,588

 
14,946

 
n/a
2017
 
 
 
 
 
 
 
 
 
 
684,250

 
369,562

 
n/a
 
 
 
 
 
 
 
 
 
 
Total

$
747,505

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative Paid Losses and Loss Expenses, Net of Reinsurance
 
 
 
 
Accident Year
 
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
 
 
 
 
 
 
<----------------------------------------------- Unaudited ------------------------------------------------>
 
 
 
 
 
2008
 
$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—

 
 
 
 
2009
 
 
—

—

—

—

—

—

—

—

—

 
 
 
 
2010
 
 
 
—

—

—

—

—

—

—

—

 
 
 
 
2011
 
 
 
 
—

5,000

5,000

10,000

10,000

10,000

10,000

 
 
 
 
2012
 
 
 
 
 
—

927

3,021

6,742

6,772

7,191

 
 
 
 
2013
 
 
 
 
 
 
—

1,233

1,586

1,685

1,717

 
 
 
 
2014
 
 
 
 
 
 
 
—

803

905

918

 
 
 
 
2015
 
 
 
 
 
 
 
 
—

—

271

 
 
 
 
2016
 
 
 
 
 
 
 
 
 
6,800

15,317

 
 
 
 
2017
 
 
 
 
 
 
 
 
 
 
44,292

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total

$
79,706

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserves for losses and loss expenses, net of reinsurance
 
$
667,799

 
 
 
 


F-45
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



(b)
Reconciliation of Loss Development Information to the Reserve for Losses and Loss Expenses
The following table reconciles the loss development information to the Company’s reserves for losses and loss expenses as at December 31, 2017:
 
 
December 31, 2017
Reserves for losses and loss expenses, net of reinsurance
 
 
Reinsurance: Property
 
$
559,203

Reinsurance: Specialty - Short-tail
 
589,037

Reinsurance: Specialty - Other
 
111,781

Insurance: Property
 
334,878

Insurance: Specialty - Short-tail
 
461,482

Insurance: Specialty - Other
 
811,081

Asset Management
 
667,799

Total reserves for losses and loss expenses, net of reinsurance
 
3,535,261

 
 
 
Loss reserves recoverable
 
 
Reinsurance: Property
 
412,592

Reinsurance: Specialty - Short-tail
 
131,287

Reinsurance: Specialty - Other
 
4,252

Insurance: Property
 
281,561

Insurance: Specialty - Short-tail
 
225,331

Insurance: Specialty - Other
 
133,974

Asset Management
 
45,000

Total loss reserves recoverable
 
1,233,997

 
 
 
Unallocated loss expenses
 
53,233

Provisions for uncollectible reinsurance
 
8,848

Other
 
51

Total reserves for losses and loss expenses
 
$
4,831,390

(c)
Historical Loss Duration
The following table summarizes the historic average annual percentage payout of incurred losses by age, net of reinsurance, as of December 31, 2017:
 
 
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance
 
 
December 31, 2017
 
 
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Reinsurance: Property
 
21.5
%
36.4
%
19.5
%
8.8
%
3.5
 %
1.9
%
n/a
n/a
n/a
n/a
Reinsurance: Specialty - Short-tail
 
38.2
%
28.5
%
13.0
%
4.8
%
4.4
 %
3.3
%
n/a
n/a
n/a
n/a
Reinsurance: Specialty - Other
 
4.2
%
32.1
%
7.9
%
3.5
%
(0.3
)%
—
%
n/a
n/a
n/a
n/a
Insurance: Property
 
30.3
%
39.1
%
18.2
%
4.4
%
3.4
 %
1.0
%
n/a
n/a
n/a
n/a
Insurance: Specialty - Short-tail
 
30.7
%
34.2
%
17.0
%
5.8
%
2.4
 %
5.8
%
n/a
n/a
n/a
n/a
Insurance: Specialty - Other
 
7.4
%
19.3
%
21.2
%
16.7
%
15.3
 %
5.5
%
n/a
n/a
n/a
n/a
Asset Management
 
3.4
%
45.5
%
13.3
%
14.6
%
0.7
 %
2.9
%
—
%
—
%
—
%
—
%

F-46
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



14. Accounts payable and accrued expenses
The Company’s account payable and accrued expenses relate primarily to amounts due to third party investors in the funds and sidecars, and to amounts borrowed in connection with the Company’s credit facilities. See Note 19, “Debt and financing arrangements,” for further details concerning these borrowings.
The following are the components of accounts payable and accrued expenses:
 
December 31, 2017
 
December 31, 2016
Accrued interest on debt
$
10,519

 
$
10,286

Subscriptions received in advance on funds and sidecars
660,000

 
326,900

Redemptions/distributions payable to noncontrolling interests
180,104

 
87,674

Structured notes payable to AlphaCat investors
—

 
1,000

Amounts payable to AlphaCat investors
18,054

 
17,068

Income tax payable
3,591

 
1,036

Accrued pension liability
11,955

 
16,979

Trade and compensation payables
115,906

 
121,805

FHLB secured facility borrowings
206,000

 
—

Derivative liabilities
19,746

 
4,900

Total accounts payable and accrued expenses
$
1,225,875

 
$
587,648

For the year ended December 31, 2017, non-cash movements in accounts payable and accrued expenses in relation to the funds and sidecars were $(48,018) (2016: $217,322; 2015: $(10,239)). Of this, redemptions/distributions payable to noncontrolling interests included non-cash movements of $91,431 (2016: $77,873; 2015: $(10,239)). Subscriptions received in advance on funds and sidecars included non-cash movements related to reinvestment of noncontrolling interests and structured notes of $(139,449) (2016: $139,449; 2015: $nil).

F-47
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



15. Reinsurance
The Company’s reinsurance balances recoverable at December 31, 2017 and 2016 were as follows:
 
December 31, 2017
 
December 31, 2016
Loss reserves recoverable on unpaid:
 
 
 
Case reserves
$
275,450

 
$
165,328

IBNR
958,547

 
265,093

Total loss reserves recoverable
1,233,997

 
430,421

Paid losses recoverable
46,873

 
35,247

Total reinsurance recoverable
$
1,280,870

 
$
465,668

(a)
Effects of reinsurance on premiums ceded, net premiums earned and losses and loss expenses
The effects of reinsurance on net premiums written and earned, and on losses and loss expenses for the years ended December 31, 2017, 2016 and 2015 were as follows:
 
Years Ended December 31,
Premiums written:
2017
 
2016
 
2015
Treaty Reinsurance
$
1,531,934

 
$
1,501,079

 
$
1,393,440

Facultative Reinsurance
280,320

 
293,741

 
325,311

Direct
1,138,684

 
853,885

 
838,755

Ceded
(469,633
)
 
(289,705
)
 
(328,681
)
Net premiums written
$
2,481,305

 
$
2,359,000

 
$
2,228,825

 
Years Ended December 31,
Premiums earned:
2017
 
2016
 
2015
Treaty Reinsurance
$
1,527,845

 
$
1,408,995

 
$
1,397,409

Facultative Reinsurance
284,243

 
307,351

 
330,472

Direct
1,413,122

 
823,641

 
852,256

Ceded
(644,122
)
 
(290,822
)
 
(333,248
)
Net premiums earned
$
2,581,088

 
$
2,249,165

 
$
2,246,889

 
Years Ended December 31,
Losses and loss expenses:
2017
 
2016
 
2015
Treaty Reinsurance
$
1,953,191

 
$
557,824

 
$
479,170

Facultative Reinsurance
273,303

 
147,231

 
162,256

Direct
1,201,957

 
539,484

 
424,312

Ceded
(1,128,273
)
 
(179,442
)
 
(87,905
)
Losses and loss expenses
$
2,300,178

 
$
1,065,097

 
$
977,833



F-48
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



(b)
Credit risk
The cession of reinsurance does not legally discharge the Company from its primary liability for the full amount of the (re)insurance policies it writes, and the Company is required to pay the loss and bear collection risk regarding reinsurers’ obligations under reinsurance and retrocession agreements. Validus records provisions for uncollectible reinsurance recoverable when collection becomes unlikely due to the reinsurer’s inability to pay.
To the extent the creditworthiness of the Company’s reinsurers were to deteriorate due to adverse events affecting the reinsurance industry, such as a large number of major catastrophes, actual uncollectible amounts could be significantly greater than the Company’s provision. Amounts recoverable from reinsurers are estimated in a manner consistent with the underlying loss reserves.
The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from its exposure to individual reinsurers. The reinsurance program is generally placed with reinsurers whose rating, at the time of placement, was A- or better as rated by Standard & Poor’s or the equivalent with other rating agencies. Exposure to a single reinsurer is also controlled with restrictions dependent on rating. As at December 31, 2017, $1,270,503 or 99.2% (December 31, 2016: $461,369 or 99.1%) of the Company’s reinsurance balances recoverable were either fully collateralized or recoverable from reinsurers rated A- or better.
Information regarding the Company’s concentration of credit risk arising from its exposure to individual reinsurers as at December 31, 2017 and 2016 is as follows:
 
December 31, 2017
 
December 31, 2016
 
Reinsurance Recoverable
 
% of Total
 
Reinsurance Recoverable
 
% of Total
Top 10 reinsurers
$
1,055,445

 
82.5
%
 
$
395,308

 
84.9
%
Other reinsurers’ balances > $1 million
218,226

 
17.0
%
 
66,944

 
14.4
%
Other reinsurers’ balances < $1 million
7,199

 
0.5
%
 
3,416

 
0.7
%
Total
$
1,280,870

 
100.0
%
 
$
465,668

 
100.0
%
 
 
December 31, 2017
Top 10 Reinsurers
 
Rating
 
Reinsurance Recoverable
 
% of Total
Fully collateralized reinsurers
 
NR
 
$
459,339

 
35.9
%
Everest Re
 
A+
 
128,206

 
10.0
%
Munich Re
 
AA-
 
94,180

 
7.4
%
Lloyd's Syndicates
 
A+
 
74,277

 
5.8
%
Federal Crop Insurance Corporation
 
(a)
 
68,745

 
5.4
%
Swiss Re
 
AA-
 
65,218

 
5.1
%
Hannover Re
 
AA-
 
53,523

 
4.2
%
Qatar Insurance Company
 
A
 
50,160

 
3.9
%
Transatlantic Re
 
A+
 
33,729

 
2.6
%
Markel
 
A
 
28,068

 
2.2
%
Total
 
 
 
$
1,055,445

 
82.5
%
NR:
Not rated
(a)
The Company participates in a crop reinsurance program sponsored by the U.S. federal government. The Company remains obligated for amounts ceded in the event that its reinsurers or retrocessionaires do not meet their obligations, except for amounts ceded to the U.S. federal government in the Insurance segment agriculture line of business.

F-49
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



 
 
December 31, 2016
Top 10 Reinsurers
 
Rating
 
Reinsurance Recoverable
 
% of Total
Lloyd's Syndicates
 
A+
 
$
84,419

 
18.2
%
Swiss Re
 
AA-
 
84,044

 
18.1
%
Fully collateralized reinsurers
 
NR
 
83,088

 
17.8
%
Hannover Re
 
AA-
 
50,603

 
10.9
%
Everest Re
 
A+
 
36,912

 
7.9
%
Munich Re
 
AA-
 
18,214

 
3.9
%
Transatlantic Re
 
A+
 
10,593

 
2.3
%
Hamilton Re
 
A-
 
10,343

 
2.2
%
Toa Re
 
A+
 
9,510

 
2.0
%
National Indemnity Company
 
AA+
 
7,582

 
1.6
%
Total
 
 
 
$
395,308

 
84.9
%
NR: Not rated
At December 31, 2017 and 2016, the provision for uncollectible reinsurance relating to reinsurance recoverables was $8,848 and $5,153, respectively.
16. Share capital
The Company’s share capital consists of Preferred Shares and Common Shares, each with a par value of $0.175 per share. Holders of Preferred Shares have no voting rights with respect to matters that generally require the approval of voting shareholders but are entitled to vote in certain extraordinary instances. Holders of common shares are entitled to one vote for each share held, subject to certain voting limitations.
The Company is authorized to issue up to an aggregate of 571,428,571 common and preferred shares with a par value of $0.175 per share.
(a)
Preferred shares
5.875% Non-Cumulative Preferred Shares, Series A (the “Series A Preferred Shares”)
On June 13, 2016, the Company issued 6,000 shares of its 5.875% Non-Cumulative Preferred Shares, Series A (the “Series A Preferred Shares”) (equivalent to 6,000,000 Depositary Shares, each of which represents a 1/1,000th interest in a Series A Preferred Share), $0.175 par value and $25,000 liquidation preference per share (equivalent to $25 per Depositary Share). The Series A Preferred Shares were registered and sold under the Securities Act of 1933, as amended, and were issued at a price to the public of $25,000 per share (equivalent to $25 per Depositary Share). After underwriting discounts and expenses, the Company received net proceeds of $144,852 which was used for general corporate purposes.
The Depositary Shares, representing the Series A Preferred Shares, are traded on the New York Stock Exchange (“NYSE”) under the symbol “VRPRA.” The Series A Preferred Shares have no stated maturity date and are redeemable, in whole or in part, at the Company’s option on and after June 15, 2021, at a redemption price of $25,000 per Series A Preferred Share (equivalent to $25 per Depositary Share), plus declared and unpaid dividends. The Company may also redeem all, but not less than all, of the Series A Preferred Shares before the redemption date at a redemption price of $26,000 per share (equivalent to $26 per Depositary Share), plus declared and unpaid dividends, if the Company is required to submit a proposal to the holders of the Series A Preferred Shares concerning an amalgamation, consolidation, merger or other similar corporate transaction or change in Bermuda law. The Series A Preferred Shares may also be redeemed before the redemption date at a redemption price of $25,000 per Series A Preferred Share (equivalent to $25 per Depositary Share), plus declared and unpaid dividends, in whole, if there is a change in tax law, or in whole or in part, in the case of a capital disqualification event.
Dividends on the Series A Preferred Shares, when, as and if declared by the Company’s Board of Directors or a duly authorized committee thereof, will accrue and be payable on the liquidation preference amount from the original issue date, on a non-cumulative

F-50
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



basis, quarterly in arrears on each dividend payment date at an annual rate of 5.875%. The Company will be restricted from paying dividends on and repurchasing its common shares, unless certain dividend payments are made on the Series A Preferred Shares.
Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, holders of the Series A Preferred Shares and any parity shares are entitled to receive out of the Company’s assets available for distribution to shareholders, before any distribution is made to holders of common shares or other junior shares, a liquidating distribution in the amount of $25,000 per Series A Preferred Share (equivalent to $25 per Depositary Share) plus declared and unpaid dividends. Distributions will be made pro rata in accordance with the respective aggregate liquidation preferences of the Series A Preferred Shares and any parity shares and only to the extent of our assets, if any, that are available after satisfaction of all liabilities to creditors.
Holders of the Series A Preferred Shares have no voting rights, except with respect to certain fundamental changes in the terms of the Series A Preferred Shares and in the case of certain dividend non-payments or as otherwise required by Bermuda law or the Company’s bye-laws.
5.800% Non-Cumulative Preferred Shares, Series B (the “Series B Preferred Shares”)
On June 12, 2017, the Company issued 10,000 shares of its 5.800% Non-Cumulative Preferred Shares, Series B (the “Series B Preferred Shares”) (equivalent to 10,000,000 Depositary Shares, each of which represents a 1/1,000th interest in a Series B Preferred Share), $0.175 par value and $25,000 liquidation preference per share (equivalent to $25 per Depositary Share). The Series B Preferred Shares were registered and sold under the Securities Act of 1933, as amended, and were issued at a price to the public of $25,000 per share (equivalent to $25 per Depositary Share). After underwriting discounts and expenses, the Company received net proceeds of $241,686 which was used for general corporate purposes.
The Depositary Shares, representing the Series B Preferred Shares, are traded on the NYSE under the symbol “VRPRB.” The Series B Preferred Shares have no stated maturity date and are redeemable, in whole or in part, at the Company’s option on and after June 21, 2022, at a redemption price of $25,000 per Series B Preferred Share (equivalent to $25 per Depository Share), plus declared and unpaid dividends. The Company may also redeem all, but not less than all, of the Series B Preferred Shares before the redemption date at a redemption price of $26,000 per share (equivalent to $26 per Depository Share), plus declared and unpaid dividends, if the Company is required to submit a proposal to the holders of the Series B Preferred Shares concerning an amalgamation, consolidation, merger or other similar corporate transaction or change in Bermuda law. The Series B Preferred Shares may also be redeemed before the redemption date at a redemption price of $25,000 per Series B Preferred Share (equivalent to $25 per Depository Share), plus declared and unpaid dividends, in whole, if there is a certain change in tax law, or in whole or in part, in the case of a capital disqualification event. However, no redemption may occur prior to June 21, 2027 unless the Company has sufficient funds in order to meet the Bermuda Monetary Authority’s (“the BMA”) Enhanced Capital Requirements (“ECR”) and the BMA approves of the redemption, or the Company replaces the capital represented by the Series B Preferred Shares with capital having equal or better capital treatment as the Series B Preferred Shares under the ECR.
Dividends on the Series B Preferred Shares, when, as and if declared by the Company’s Board of Directors or a duly authorized committee thereof, will accrue and be payable on the liquidation preference amount from the original issue date, on a non-cumulative basis, quarterly in arrears on each dividend payment date at an annual rate of 5.800%. The Company will be restricted from paying dividends on and repurchasing its common shares, unless certain dividend payments are made on the Series B Preferred Shares.
Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, holders of the Series B Preferred Shares and any parity shares are entitled to receive out of our assets available for distribution to shareholders, before any distribution is made to holders of common shares or other junior shares, a liquidating distribution in the amount of $25,000 per Series B Preferred Share (equivalent to $25 per Depositary Share) plus declared and unpaid dividends. Distributions will be made pro rata in accordance with the respective aggregate liquidation preferences of the Series B Preferred Shares and any parity shares and only to the extent of our assets, if any, that are available after satisfaction of all liabilities to creditors.
Holders of the Series B Preferred Shares have no voting rights, except with respect to certain fundamental changes in the terms of the Series B Preferred Shares and in the case of certain dividend non-payments or as otherwise required by Bermuda law or the Company’s bye-laws.

F-51
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



The following table is a summary of the preferred share activity during the years ended December 31, 2017 and 2016:
 
Years Ended December 31,
 
2017
 
2016
Preferred shares issued and outstanding, beginning of year
6,000

 
—

Preferred shares issued
10,000

 
6,000

Preferred shares issued and outstanding, end of year
16,000

 
6,000

The Company had 6,000 Series A Preferred Shares and 10,000 Series B Preferred Shares issued and outstanding as at December 31, 2017 and 6,000 Series A Preferred Shares issued and outstanding as at December 31, 2016.
(b) Common shares
The holders of common shares are entitled to receive dividends and are allocated one vote per share, provided that, if the controlled shares of any shareholder or group of related shareholders constitute more than 9.09 percent of the outstanding common shares of the Company, their voting power will be reduced to 9.09 percent.
The Company may from time to time repurchase its securities, including common shares, Junior Subordinated Deferrable Debentures and Senior Notes. On February 3, 2015, the Board of Directors of the Company approved an increase in the Company’s common share repurchase authorization to $750,000. This amount was in addition to the $2,274,401 of common shares repurchased by the Company through February 3, 2015 under its previously authorized share repurchase programs.
The Company has repurchased 81,035,969 common shares for an aggregate purchase price of $2,730,975 from the inception of its share repurchase program to December 31, 2017. The Company had $293,426 remaining under its authorized share repurchase program as of December 31, 2017.
The Company expects the purchases under its share repurchase program to be made from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program will depend on a variety of factors, including market conditions, the Company’s capital position relative to internal and rating agency targets, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board of Directors at any time.
The following table is a summary of the common shares issued and outstanding during the years ended December 31, 2017, 2016 and 2015:
 
Years Ended December 31,
 
2017
 
2016
 
2015
Common shares issued, beginning of year
161,279,976

 
160,570,772

 
155,554,224

Restricted share awards vested, net of shares withheld
630,515

 
612,100

 
614,945

Restricted share units vested, net of shares withheld
15,454

 
18,486

 
13,260

Options exercised
26,136

 
30,530

 
782,465

Warrants exercised
—

 
—

 
3,593,715

Direct issuance of common stock
—

 
—

 
639

Performance shares vested, net of shares withheld
42,410

 
48,088

 
11,524

Common shares issued, end of year
161,994,491

 
161,279,976

 
160,570,772

Treasury shares, end of year
(82,674,941
)
 
(82,147,724
)
 
(77,670,155
)
Common shares outstanding, end of year
79,319,550

 
79,132,252

 
82,900,617


F-52
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



(c) Dividends
The Company announced four quarterly cash dividends of $0.38 per common share during the year ended December 31, 2017 (2016: $0.35). These dividends were paid on March 31, 2017, June 30, 2017, September 29, 2017 and December 29, 2017 to shareholders of record on March 15, 2017, June 15, 2017, September 15, 2017 and December 15, 2017, respectively.
On November 1, 2017, the Company announced cash dividends of $0.3671875 (2016: $0.3671875) and $0.3625000 per depositary share on its outstanding Series A and Series B Preferred Shares, respectively. The preferred share dividends were paid on December 15, 2017 to shareholders on record on December 1, 2017.
On August 9, 2017, the Company announced cash dividends of $0.3671875 (2016: $0.3753472) and $0.3423611 per depositary share on its outstanding Series A and Series B Preferred Shares, respectively. The preferred share dividends were paid on September 15, 2017 to shareholders of record on September 1, 2017.
On May 10, 2017, the Company announced a cash dividend of $0.3671875 per depositary share on its outstanding Series A Preferred Shares. The preferred share dividend was paid on June 15, 2017 to shareholders of record on June 1, 2017.
On February 9, 2017, the Company announced a cash dividend of $0.3671875 per depositary share on its outstanding Series A Preferred Shares. The preferred share dividend was paid on March 15, 2017 to shareholders of record on March 1, 2017.
17. Stock plans
(a)
Long Term Incentive Plan
The Company’s Amended and Restated 2005 Long Term Incentive Plan (“LTIP”) provides for grants to employees of options, stock appreciation rights (“SARs”), restricted shares, restricted share units, performance shares, dividend equivalents or other share-based awards. The total number of shares reserved for issuance under the LTIP are 2,753,292, of which 702,305 shares are remaining. The LTIP is administered by the Compensation Committee of the Board of Directors. No SARs have been granted to date. The grant date fair value of each award is established at the fair market value of the Company’s common shares at the date of grant.
(i)    Options
The Company has not granted any stock option awards since September 4, 2009. These stock option awards were fully amortized as at December 31, 2012, and the final options outstanding were exercised during the year ended December 31, 2017.
While outstanding, the Company’s options could be exercised for voting common shares upon vesting and had a term of ten years. The fair value of the option awards at the date of grant was determined using the Black-Scholes option-pricing model. Expected volatility was based on the stock price volatility of comparable publicly-traded companies. The Company used the simplified method consistent with U.S. GAAP authoritative guidance on stock compensation expenses to estimate expected lives for options granted during the period.
Activity with respect to options for the year ended December 31, 2017 was as follows:
 
Options
 
Weighted Average Grant Date Fair Value
 
Weighted Average Grant Date Exercise Price
 
Total Intrinsic Value (a)
 
Company Proceeds Received
Options outstanding, beginning of year
26,136

 
$
6.78

 
$
23.48

 
 
 
 
Options exercised
(26,136
)
 
6.78

 
23.48

 
$
748

 
$
614

Options outstanding, end of year
—

 
$
—

 
$
—

 
 
 
 

F-53
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



Activity with respect to options for the year ended December 31, 2016 was as follows:
 
Options
 
Weighted Average Grant Date Fair Value
 
Weighted Average Grant Date Exercise Price
 
Total Intrinsic Value (a)
 
Company Proceeds Received
Options outstanding, beginning of year
65,401

 
$
7.74

 
$
20.17

 
 
 
 
Options exercised
(39,265
)
 
8.37

 
17.96

 
$
1,260

 
$
277

Options outstanding, end of year
26,136

 
$
6.78

 
$
23.48

 
 
 
 
Activity with respect to options for the year ended December 31, 2015 was as follows:
 
Options
 
Weighted Average Grant Date Fair Value
 
Weighted Average Grant Date Exercise Price
 
Total Intrinsic Value (a)
 
Company Proceeds Received
Options outstanding, beginning of year
1,160,057

 
$
7.12

 
$
17.74

 
 
 
 
Options exercised
(1,094,656
)
 
7.09

 
17.60

 
$
26,367

 
$
6,277

Options outstanding, end of year
65,401

 
$
7.74

 
$
20.17

 
 
 
 
(a)
The total intrinsic value in the tables above represent the amount by which the market price of the Company’s common stock exceeds the option strike price, multiplied by the number of options exercised during the year.
The aggregate intrinsic value of the options outstanding and exercisable at December 31, 2016 was $831.
(ii)    Restricted share awards
Restricted shares granted under the LTIP vest either pro rata or 100% at the end of the required service period and contain certain restrictions during the vesting period, relating to, among other things, forfeiture in the event of termination of employment, and transferability. Share compensation expenses of $35,011 were recorded in connection with restricted share awards for the year ended December 31, 2017 (2016: $36,887; 2015: $35,386). The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.
Activity with respect to unvested restricted share awards for the years ended December 31, 2017, 2016 and 2015 was as follows:
 
Years Ended December 31,
 
2017
 
2016
 
2015
 
Restricted Share Awards
 
Weighted Average Grant Date Fair Value
 
Restricted Share Awards
 
Weighted Average Grant Date Fair Value
 
Restricted Share Awards
 
Weighted Average Grant Date Fair Value
Restricted share awards outstanding, beginning of year
2,469,982

 
$
40.89

 
2,739,446

 
$
38.25

 
2,858,711

 
$
35.81

Restricted share awards granted
511,561

 
53.22

 
564,345

 
48.83

 
724,357

 
43.67

Restricted share awards vested
(842,469
)
 
41.34

 
(796,716
)
 
37.40

 
(788,758
)
 
34.41

Restricted share awards forfeited
(58,677
)
 
43.77

 
(37,093
)
 
41.27

 
(54,864
)
 
38.14

Restricted share awards outstanding, end of year
2,080,397

 
$
43.66

 
2,469,982

 
$
40.89

 
2,739,446

 
$
38.25

At December 31, 2017, there were $48,907 (December 31, 2016: $58,804) of total unrecognized share compensation expenses in respect of restricted share awards that are expected to be recognized over a weighted-average period of 2.3 years (December 31, 2016: 2.3 years).

F-54
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



(iii)    Restricted share units
Restricted share units under the LTIP vest either ratably or 100% at the end of the required service period and contain certain restrictions during the vesting period, relating to, among other things, forfeiture in the event of termination of employment, and transferability. Share compensation expenses of $1,319 were recorded in connection with restricted share units for the year ended December 31, 2017 (2016: $1,285; 2015: $1,160). The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.
Activity with respect to unvested restricted share units for the years ended December 31, 2017, 2016 and 2015 was as follows:
 
Years Ended December 31,
 
2017
 
2016
 
2015
 
Restricted Share Units
 
Weighted Average Grant Date Fair Value
 
Restricted Share Units
 
Weighted Average Grant Date Fair Value
 
Restricted Share Units
 
Weighted Average Grant Date Fair Value
Restricted share units outstanding, beginning of year
112,808

 
$
40.95

 
114,337

 
$
38.47

 
103,484

 
$
36.54

Restricted share units granted
12,236

 
53.40

 
27,609

 
50.03

 
28,057

 
42.91

Restricted share units vested
(18,748
)
 
41.91

 
(23,982
)
 
38.18

 
(19,455
)
 
34.58

Restricted share units issued in lieu of cash dividends
3,098

 
41.63

 
3,182

 
39.36

 
3,143

 
37.53

Restricted share units forfeited
—

 
—

 
(8,338
)
 
44.34

 
(892
)
 
35.42

Restricted share units outstanding, end of year
109,394

 
$
42.20

 
112,808

 
$
40.95

 
114,337

 
$
38.47

At December 31, 2017, there were $1,909 (December 31, 2016: $2,542) of total unrecognized share compensation expenses in respect of restricted share units that are expected to be recognized over a weighted-average period of 2.4 years (December 31, 2016: 2.6 years).

F-55
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



(iv)    Performance share awards
Performance share awards vest three years after the grant date, with the grant date fair value of each share awarded recognized evenly over this period. The number of performance shares initially granted is adjusted via “conversion adjustments” to reflect the compounded growth in the Dividend-Adjusted Book Value per Diluted Share over the three years. The cumulative compensation expense recognized and unrecognized as at any reporting period date represents the adjusted estimate of performance shares that will ultimately be awarded, valued at their original grant date fair values.
Share compensation expenses of $3,781 were recorded for the year ended December 31, 2017 (2016: $4,735; 2015: $1,795). The share compensation expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.
Activity with respect to unvested performance share awards for the years ended December 31, 2017, 2016 and 2015 was as follows:
 
Years Ended December 31,
 
2017
 
2016
 
2015
 
Performance Share Awards
 
Weighted Average Grant Date Fair Value
 
Performance Share Awards
 
Weighted Average Grant Date Fair Value
 
Performance Share Awards
 
Weighted Average Grant Date Fair Value
Performance share awards outstanding, beginning of year
285,820

 
$
44.53

 
172,594

 
$
40.70

 
106,369

 
$
36.03

Performance share awards granted
107,209

 
53.40

 
125,290

 
48.75

 
81,569

 
45.03

Performance share awards vested
(52,639
)
 
37.33

 
(57,581
)
 
36.11

 
(15,344
)
 
31.38

Performance share awards conversion adjustment
(26,322
)
 
36.82

 
45,517

 
36.82

 
—

 
—

Performance share awards outstanding, end of year
314,068

 
$
49.37

 
285,820

 
$
44.53

 
172,594

 
$
40.70

At December 31, 2017, there were $7,813 (December 31, 2016: $6,902) of total unrecognized share compensation expenses in respect of performance share awards that are expected to be recognized over a weighted-average period of 1.9 years (December 31, 2016: 2.1 years).
(b)
Total share compensation expenses
The breakdown of share compensation expenses by award type is as follows:
 
Years Ended December 31,
 
2017
 
2016
 
2015
Restricted share awards
$
35,011

 
$
36,887

 
$
35,386

Restricted share units
1,319

 
1,285

 
1,160

Performance share awards
3,781

 
4,735

 
1,795

Total
$
40,111

 
$
42,907

 
$
38,341

In addition, the Company recorded $(246) of associated tax (expense) for the year ended December 31, 2017 (2016: benefit of $1,869; 2015: benefit of $3,436). The Company also recognized $1,837 of net windfall taxes during the year ended December 31, 2017 (2016: $1,203; 2015: $906) in relation to share vestings and option exercises.

F-56
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



18. Retirement and pension plans
(a)
Defined benefit plans
Certain senior executives and retired selected key employees of our U.S.-based insurance operations participate in non-qualified, unfunded, defined benefit plans. Benefits for these plans are based on final average earnings, social security benefits earned at retirement date and years of service.
The assumptions used to determine net periodic pension expense for the years ended December 31, 2017 and 2016 are as follows:    
 
Years Ended December 31,
 
2017
 
2016
Discount rate
3.75
%
 
3.50
%
Increase in compensation levels rate
5.00
%
 
5.00
%
The assumptions used to determine benefit obligations as at December 31, 2017 and 2016 are as follows:
 
December 31, 2017
 
December 31, 2016
Discount rate
3.50
%
 
4.00
%
Increase in compensation levels rate
5.00
%
 
5.00
%

F-57
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



The following tables present a reconciliation of the beginning and ending funded status and the net amounts recognized for the defined benefit plans for the years ended December 31, 2017 and 2016:
 
Years Ended December 31,
 
2017
 
2016
Change in benefit obligation
 
 
 
Projected benefit obligation, beginning of year
$
16,979

 
$
15,722

Service cost
1,005

 
1,026

Interest cost
566

 
594

Actuarial (gains) losses
(3,719
)
 
1,473

Benefit payments
(71
)
 
(98
)
Settlements
(2,805
)
 
(1,738
)
Projected benefit obligation, end of year
$
11,955

 
$
16,979

 
 
 
 
Change in plan assets
 
 
 
Fair value of plan assets, beginning of year
$
—

 
$
—

Employer contributions
2,876

 
1,836

Benefit payments
(71
)
 
(98
)
Settlements
(2,805
)
 
(1,738
)
Fair value of plan assets, end of year
—

 
—

Funded status at end of year
$
(11,955
)
 
$
(16,979
)
 
 
 
 
Net amount recognized in accounts payable and accrued expenses
$
(11,955
)
 
$
(16,979
)
 
 
 
 
Amounts recognized in accumulated other comprehensive loss consist of
 
 
 
Net (gain) loss
$
(4,188
)
 
$
226

Prior service credit
6

 
6

Net amount recognized
$
(4,182
)
 
$
232

 
 
 
 
 
December 31, 2017
 
December 31, 2016
Projected benefit obligation
$
11,955

 
$
16,979

Accumulated benefit obligation
$
10,666

 
$
13,480

Fair value of plan assets
$
—

 
$
—

The components of net periodic pension expense for the years ended December 31, 2017, 2016 and 2015 are as follows:
 
Years Ended December 31,
 
2017
 
2016
 
2015
Service cost
$
1,005

 
$
1,026

 
$
1,024

Interest cost
566

 
594

 
434

Amortization of prior service credit
—

 
(2
)
 
(2
)
Amortization of net loss
158

 
374

 
312

Net periodic benefit cost
1,729

 
1,992

 
1,768

Settlement loss
537

 
356

 
484

Net periodic pension expense
$
2,266

 
$
2,348

 
$
2,252


F-58
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



Other changes in plan assets and benefit obligations recognized in other comprehensive loss for the years ended December 31, 2017, 2016 and 2015 are as follows:
 
Years Ended December 31,
 
2017
 
2016
 
2015
Net (gain) loss
$
(3,719
)
 
$
1,473

 
$
(43
)
Amortization of loss
(158
)
 
(374
)
 
(312
)
Amortization of prior service credit
—

 
2

 
2

Settlement loss
(537
)
 
(356
)
 
(484
)
Total recognized in other comprehensive (income) loss
$
(4,414
)
 
$
745

 
$
(837
)
Total recognized in net pension expense and other comprehensive loss (before tax effects)
$
(2,148
)
 
$
3,093

 
$
1,415

The estimated amount of net (gain) and prior service cost expected to be amortized from accumulated other comprehensive (loss) income into net periodic pension expense over the next fiscal year is $(10).
The employer benefit payments/settlements for the year ended December 31, 2017 were $2,876 (2016: $1,836). As at December 31, 2017, the projected benefits are as follows:
 
 
December 31, 2017
2018
 
$
336

2019
 
6,597

2020
 
2,696

2021
 
66

2022
 
64

2023-2026
 
4,765

Total benefit payments required
 
$
14,524

(b)
Other pension plans
The Company provides pension benefits to eligible employees through various plans which are managed externally and sponsored by the Company. The Company’s contributions are expensed as incurred. The Company’s expenses for its defined contribution retirement plans for the years ended December 31, 2017, 2016 and 2015 were $13,085, $13,419 and $13,684, respectively.

F-59
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



19. Debt and financing arrangements
The Company’s financing structure is comprised of debentures and senior notes payable along with credit and other facilities.
(a)
Senior Notes and Junior Subordinated Deferrable Debentures
The Company’s outstanding debentures and senior notes payable as at December 31, 2017 and 2016 were as follows:
 
December 31, 2017
 
December 31, 2016
Deferrable debentures
 
 
 
2006 Junior Subordinated
$
150,000

 
$
150,000

2007 Junior Subordinated
139,800

 
139,800

Flagstone 2006 Junior Subordinated
135,608

 
133,676

Flagstone 2007 Junior Subordinated
113,750

 
113,750

Total debentures payable
539,158

 
537,226

2010 Senior Notes due 2040
250,000

 
250,000

Less: Unamortized debt issuance costs
(4,436
)
 
(4,638
)
Total senior notes payable
245,564

 
245,362

Total debentures and senior notes payable
$
784,722

 
$
782,588

The following table summarizes the key terms of the Company’s Senior Notes and Junior Subordinated deferrable debentures:
Description
 
Issuance date
 
Issued
 
Maturity date
 
Interest Rate as at
 
Interest payments due
 
Issuance Date
 
December 31, 2017
 
2006 Junior Subordinated Deferrable Debentures
 
June 15, 2006
 
$
150,000

 
June 15, 2036
 
9.069
%
(a) 
 
5.831
%
(e) 
 
Quarterly
Flagstone 2006 Junior Subordinated Deferrable Debentures
 
August 23, 2006
 
$
135,608

 
September 15, 2036
 
3.540
%
(b) 
 
6.463
%
(e) 
 
Quarterly
2007 Junior Subordinated Deferrable Debentures
 
June 21, 2007
 
$
200,000

 
June 15, 2037
 
8.480
%
(c) 
 
5.180
%
(e) 
 
Quarterly
Flagstone 2007 Junior Subordinated Deferrable Debentures
 
June 8, 2007
 
$
100,000

 
July 30, 2037
 
3.000
%
(b) 
 
5.900
%
(e) 
 
Quarterly
Flagstone 2007 Junior Subordinated Deferrable Debentures
 
September 20, 2007
 
$
25,000

 
September 15, 2037
 
3.100
%
(b) 
 
5.983
%
(e) 
 
Quarterly
2010 Senior Notes due 2040
 
January 26, 2010
 
$
250,000

 
January 26, 2040
 
8.875
%
(d) 
 
8.875
%
(d) 
 
Semi-annually in arrears
(a)
Fixed interest rate for 5 years, floating interest rate of three-month LIBOR plus 3.550% thereafter, reset quarterly.
(b)
Floating interest rate of three-month LIBOR plus amount stated, reset quarterly.
(c)
Fixed interest rate for 5 years, floating interest rate of three-month LIBOR plus 2.950% thereafter, reset quarterly.
(d)
Fixed interest rate.
(e)
Fixed interest rate as a result of interest rate swap contracts entered into by the Company.
Senior Notes
The 2010 Senior Notes due 2040 (the “2010 Senior Notes”) were part of a registered public offering and mature on January 26, 2040. The Company may redeem the notes, in whole at any time, or in part from time to time, at the Company’s option on not less than 30 nor more than 60 days’ notice, at a make-whole redemption price as described in “Description of the Notes - Optional Redemption” in the 2010 Senior Notes prospectus supplement. In addition, the Company may redeem the notes, in whole, but not

F-60
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



in part, at any time upon the occurrence of certain tax events as described in “Description of the Notes - Redemption for Tax Purposes” in the prospectus supplement.
Debt issuance costs are amortized to income over the life of the 2010 Senior Notes and are presented on a net basis within the senior notes payable balance in the Company’s Consolidated Balance Sheets. There were no redemptions made during the year ended December 31, 2017 and 2016.
The 2010 Senior Notes are unsecured and unsubordinated obligations of the Company and rank equally in right of payment with all of the Company’s existing and future unsecured and unsubordinated indebtedness. The 2010 Senior Notes will be effectively junior to all of the Company’s future secured debt, to the extent of the value of the collateral securing such debt, and will rank senior to all our existing and future subordinated debt. The 2010 Senior Notes are structurally subordinated to all obligations of the Company’s subsidiaries.
Future payments of principal of $250,000 on the 2010 Senior Notes are all expected to be after 2022.
Junior Subordinated Deferrable Debentures
The Company participated in private placements of Junior Subordinated Deferrable Debentures due 2036 and 2037 (respectively, the “2006 Junior Subordinated Deferrable Debentures” and “2007 Junior Subordinated Deferrable Debentures”).
Debt issuance costs for the 2006 and 2007 Junior Subordinated Deferrable Debentures were amortized to income over the five year optional redemption periods. They are redeemable at the Company’s option at par. There were no redemptions made during the year ended December 31, 2017 and 2016.
As part of the acquisition of Flagstone, the Company assumed Junior Subordinated Deferrable Debentures due 2036 and 2037 (respectively, the “Flagstone 2006 Junior Subordinated Deferrable Debentures” and “Flagstone 2007 Junior Subordinated Deferrable Debentures”). These debentures are redeemable quarterly at par. There were no redemptions made during the year ended December 31, 2017 and 2016.
Future payments of principal of $539,158 on the debentures discussed above are all expected to be after 2022.
(b)
Credit and other facilities
The Company’s outstanding credit facilities as at December 31, 2017 and 2016 were as follows:
 
 
December 31, 2017
Credit facility
 
Commitment
 
Outstanding (a)
 
Drawn (b)
 
Cash and investments pledged as collateral
$85,000 syndicated unsecured letter of credit facility
 
$
85,000

 
$
—

 
$
—

 
$
—

$300,000 syndicated secured letter of credit facility
 
300,000

 
92,979

 
—

 
118,188

$24,000 secured bi-lateral letter of credit facility
 
24,000

 
5,765

 
—

 
22,340

$25,000 IPC bi-lateral facility
 
25,000

 
7,754

 
—

 
—

$236,000 Flagstone bi-lateral facility
 
236,000

 
115,682

 
—

 
184,569

$65,000 unsecured revolving credit facility
 
65,000

 
—

 
—

 
—

$100,000 unsecured revolving credit facility
 
100,000

 
—

 
—

 
—

FHLB secured facility
 
484,096

 
206,000

 
206,000

 
251,767

Total credit facilities
 
$
1,319,096

 
$
428,180

 
$
206,000

 
$
576,864

(a)
Indicates utilization of commitment amount.
(b)
Represents drawn borrowings included in accounts payable and accrued expenses.

F-61
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



 
 
December 31, 2016
Credit facility
 
Commitment
 
Outstanding (a)
 
Drawn (b)
 
Cash and investments pledged as collateral
$85,000 syndicated unsecured letter of credit facility
 
$
85,000

 
$
—

 
$
—

 
$
—

$300,000 syndicated secured letter of credit facility
 
300,000

 
121,428

 
—

 
157,597

$24,000 secured bi-lateral letter of credit facility
 
24,000

 
4,553

 
—

 
48,097

$20,000 AlphaCat Re secured letter of credit facility (c)
 
20,000

 
20,000

 
—

 
20,032

$25,000 IPC bi-lateral facility
 
25,000

 
8,807

 
—

 
—

$236,000 Flagstone bi-lateral facility
 
236,000

 
156,375

 
—

 
216,458

Total credit facilities
 
$
690,000

 
$
311,163

 
$
—

 
$
442,184

(a)
Indicates utilization of commitment amount.
(b)
Represents drawn borrowings.
(c)
The Company terminated its AlphaCat Re secured letter of credit facility on January 6, 2017.
(i)$85,000 syndicated unsecured letter of credit facility and $300,000 syndicated secured letter of credit facility
On December 9, 2015, the Company entered into a $85,000 five year unsecured facility with various counterparties as co-documentation agents and the lenders party thereto, which provides for letter of credit (“LOC”) and revolving credit availability for the Company (the “Five Year Unsecured Facility”) (the full $85,000 of which is available for LOCs and/or revolving loans). The Five Year Unsecured Facility was provided by a syndicate of commercial banks. LOCs under the Five Year Unsecured Facility are available to support obligations in connection with Validus’ reinsurance business. Loans under the Five Year Unsecured Facility are available for the general corporate and working capital purposes of the Company. The Company may request that existing lenders under the Five Year Unsecured Facility or prospective additional lenders agree to make available additional commitments from time to time so long as the aggregate commitments under the Five Year Unsecured Facility do not exceed $150,000.
Also on December 9, 2015, the Company entered into a $300,000 five year secured credit facility, with the same parties, which provides for LOC availability for the Company (the “Five Year Secured Facility” and together with the Five Year Unsecured Facility, the “Credit Facilities”). The Five Year Secured Facility was also provided by a syndicate of commercial banks. LOCs under the Five Year Secured Facility will be available to support obligations in connection with Validus’ reinsurance business. The Company may request that existing lenders under the Five Year Secured Facility or prospective additional lenders agree to make available additional commitments from time to time so long as the aggregate commitments under the Five Year Secured Facility do not exceed $400,000. The obligations of the Company under the Five Year Secured Facility are secured by cash and securities deposited into cash collateral accounts from time to time with The Bank of New York Mellon.
As of December 31, 2017, there was $nil (December 31, 2016: $nil) of outstanding LOCs under the Five Year Unsecured Facility and $92,979 (December 31, 2016: $121,428) of outstanding LOCs under the Five Year Secured Facility.
The Credit Facilities contain covenants that include, among other things (i) the requirement that Validus Holdings, Ltd. initially maintain a minimum level of consolidated net worth of at least $2,600,000 and, commencing with the end of the fiscal quarter ending June 30, 2015, to be increased quarterly by an amount equal to 25.0% of the Company’s consolidated net income (if positive) for such quarter plus 50.0% of the aggregate increases in the consolidated shareholders’ equity of the Company during such fiscal quarter by reason of the issuance and sale of common equity interests of the Company, including upon any conversion of debt securities of the Company into such equity interests, (ii) the requirement that Validus Holdings, Ltd. maintain at all times a consolidated total debt to consolidated total capital ratio not greater than 0.35:1.00, and (iii) the requirement that Validus Re and any other material insurance subsidiaries maintain a financial strength rating by A.M. Best of not less than “B++” (Fair). In addition, the Credit Facilities contain customary negative covenants applicable to the Company, including limitations on the ability to pay dividends and other payments in respect of equity interests at any time that the Company is otherwise in default with respect to certain provisions under the respective Credit Facilities, limitations on the ability to incur liens, sell assets, merge or consolidate with others, enter into transactions with affiliates, and limitations on the ability of its subsidiaries to incur indebtedness. The Credit Facilities also contain customary affirmative covenants, representations and warranties and events of default for credit facilities of its type. As of December 31, 2017, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the Credit Facilities.

F-62
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



(ii)$24,000 secured bi-lateral letter of credit facility
The Company is party to an evergreen secured bi-lateral LOC facility with Citibank Europe plc (the “Secured bi-lateral LOC facility”). As of December 31, 2017, $5,765 (December 31, 2016: $4,553) of LOCs were outstanding under the Secured bi-lateral LOC facility. The Secured bi-lateral LOC facility has no fixed termination date and as of December 31, 2017, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the Secured bi-lateral LOC facility.
(iii)$25,000 IPC bi-lateral facility
The Company assumed an existing evergreen LOC facility through the acquisition of IPC Holdings, Ltd. (the “IPC bi-lateral facility”). As of December 31, 2017, $7,754 of LOCs were outstanding under the IPC bi-lateral facility (December 31, 2016: $8,807). As of December 31, 2017, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the IPC bi-lateral facility.
(iv)$20,000 AlphaCat Re secured letter of credit facility
During 2013, AlphaCat Re entered into a secured evergreen LOC facility with Comerica Bank. This facility provided for LOCs issued by AlphaCat Re to be used to support its reinsurance obligations. The Company terminated its AlphaCat Re secured letter of credit facility on January 6, 2017. As of December 31, 2016, $20,000 of LOCs were outstanding under this facility. As of December 31, 2016, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the AlphaCat Re secured LOC facility.
(v)$236,000 Flagstone bi-lateral facility
As part of the acquisition of Flagstone, the Company assumed an evergreen LOC Master Agreement between Citibank Europe plc and Flagstone Reassurance Suisse, S.A. (the “Flagstone Bi-Lateral Facility”). As of December 31, 2017, $115,682 (December 31, 2016: $156,375) of LOCs were outstanding under the Flagstone Bi-Lateral Facility. As of December 31, 2017, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the Flagstone Bi-Lateral Facility.
(vi)$65,000 unsecured revolving credit facility and $100,000 unsecured revolving credit facility
On August 7, 2017, Validus Holdings, Ltd. and Validus Re entered into a $65,000 unsecured revolving credit facility with Barclays Bank PLC, as the lender (the “Barclays Unsecured Revolving Facility”) expiring August 6, 2018. Loans under the Barclays Unsecured Revolving Facility will be available for the general corporate and working capital purposes of the Company. Borrowings under the Barclays Unsecured Revolving Facility bear interest at the base rate (the higher of (i) the prime rate quoted in the Wall Street Journal, (ii) the federal reserve bank effective rate plus 0.50%, and (iii) the adjusted LIBOR rate plus 1.0%) or the adjusted LIBOR rate applicable to such loans, plus an applicable rate.
Also on August 7, 2017, Validus Holdings, Ltd. and Validus Re entered into a $100,000 unsecured revolving credit facility with HSBC Bank USA, National Association, as the lender (the “HSBC Unsecured Revolving Facility” and together with the Barclays Unsecured Revolving Facility, the “Barclays and HSBC Unsecured Revolving Credit Facilities”) expiring December 31, 2019. Loans under the HSBC Unsecured Revolving Facility will be available for the general corporate and working capital purposes of the Company. Borrowings under the HSBC Unsecured Revolving Facility bear interest at the base rate (the higher of (i) the prime rate announced by HSBC Bank USA, National Association, (ii) the higher of the federal reserve bank effective rate the overnight bank funding rate plus 0.50%, or (iii) the adjusted LIBOR rate plus 1.0%).
As of December 31, 2017, there was $65,000 (December 31, 2016: $nil) of available credit under the Barclays Unsecured Revolving Facility and $100,000 (December 31, 2016: $nil) of available credit under the HSBC Unsecured Revolving Facility.
The Barclays and HSBC Unsecured Revolving Credit Facilities contain covenants that include, among other things (i) the requirement that the Company initially maintain a minimum level of consolidated net worth of at least $2,789,131 and, commencing with the end of the fiscal quarter ending September 30, 2017, to be increased quarterly by an amount equal to 25% of the Company’s consolidated net income (if positive) for such quarter plus 50% of the aggregate increases in the consolidated shareholders’ equity of the Company during such fiscal quarter by reason of the issuance and sale of common equity interests of the Company, including upon any conversion of debt securities of the Company into such equity interests, (ii) the requirement that Validus Holdings, Ltd. maintain at all times a consolidated total debt to consolidated total capital ratio not greater than 0.35:1.00, and (iii) the requirement that Validus Re and any certain other material insurance subsidiaries maintain a financial strength rating by A.M. Best of not less

F-63
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



than “B++” (Fair). In addition, the Barclays and HSBC Unsecured Revolving Credit Facilities contain customary negative covenants applicable to the Company, including limitations on the ability to pay dividends and other payments in respect of equity interests at any time that the Company is otherwise in default with respect to certain provisions under the respective Credit Facilities, limitations on the ability to incur liens, sell assets, merge or consolidate with others, enter into transactions with affiliates, and limitations on the ability of its subsidiaries to incur indebtedness. The Barclays and HSBC Unsecured Revolving Credit Facilities also contain customary affirmative covenants, representations and warranties and events of default for credit facilities of its type.
As of December 31, 2017, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the Barclays and HSBC Unsecured Revolving Facilities.
(vii)Federal Home Loan Bank of New York (“FHLB”) secured facility
On August 16, 2017, the Company became a member of the Federal Home Loan Bank of New York (“FHLB”), which provides the Company with access to a secured asset-based borrowing capacity (the “FHLB Secured Facility”). Loans under the FHLB Secured Facility are available for the Company’s general corporate and working capital purposes. The Company’s borrowing potential is based on the financial condition and eligible collateral availability of the Company’s U.S. based insurance subsidiaries. Currently FHLB limits the borrowing capacity at 30% of each member company’s statutory admitted assets as of the previous reporting quarter.
As at December 31, 2017, the Company’s maximum borrowing capacity was $484,096. As at December 31, 2017, the Company’s borrowings under the FHLB Secured Facility totaled $206,000, and had a weighted-average interest rate associated with them of 1.59%. The FHLB Secured Facility has no fixed termination date.
The Company is required to pledge a minimum level of collateral, including securities pledged as collateral, as specified in writing by the FHLB in order to maintain its borrowing potential. At December 31, 2017, the Company had pledged assets of $251,767 as collateral in support of borrowings under the FHLB Secured Facility. As of December 31, 2017, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the FHLB Secured Facility.
(c)
Finance expenses
Finance expenses consist of interest on the Junior Subordinated Deferrable Debentures and the 2010 Senior Notes, the amortization of debt offering costs, credit facility fees, bank charges, Talbot Funds at Lloyds (“FAL”) facility costs, AlphaCat financing fees and other charges as follows:
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
2006 Junior Subordinated Deferrable Debentures
 
$
8,868

 
$
8,893

 
$
8,868

2007 Junior Subordinated Deferrable Debentures
 
7,342

 
7,362

 
7,341

Flagstone 2006 Junior Subordinated Deferrable Debentures
 
9,012

 
9,028

 
8,989

Flagstone 2007 Junior Subordinated Deferrable Debentures
 
7,013

 
7,100

 
7,123

2010 Senior Notes
 
22,389

 
22,388

 
22,388

Credit facilities
 
2,014

 
2,060

 
6,006

Bank charges, Talbot FAL facility and other charges (a)
 
1,766

 
504

 
4,592

AlphaCat fees (b)
 
142

 
1,185

 
9,435

Total finance expenses
 
$
58,546

 
$
58,520

 
$
74,742

(a)
See Note 22, “Commitments and contingencies,” for further details on the Company’s FAL. On November 30, 2015, the Company terminated its Talbot FAL Facility provided and arranged by Lloyds Bank plc and ING Bank N.V., London Branch.
(b)
Includes finance expenses incurred by AlphaCat Managers in relation to fund raising for the AlphaCat sidecars, the AlphaCat ILS funds and AlphaCat direct.

F-64
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



20. Income taxes
The Company provides for income taxes based upon amounts reported in the financial statements and the provisions of currently enacted tax laws. The Company is registered in Bermuda and is subject to Bermuda law with respect to taxation. Under current Bermuda law, the Company is not taxed on any Bermuda income or capital gains and has received an undertaking from the Bermuda Minister of Finance that, in the event of any Bermuda income or capital gains taxes being imposed, the Company will be exempt from such taxes until March 31, 2035.
The Company has subsidiaries and branches with operations in several jurisdictions outside Bermuda, including but not limited to the U.K., U.S., Switzerland and Canada that are subject to relevant taxes in those jurisdictions. Within Note 25, “Segment information,” gross premiums written are allocated to the territory of coverage exposure and therefore do not correlate to pre-tax income generated in any of the territories identified.
The Company’s (loss) income before income taxes for the years ended December 31, 2017, 2016 and 2015 was generated in the following domestic and foreign jurisdictions:
 
Years Ended December 31,
 
2017
 
2016
 
2015
Domestic
 
 
 
 
 
Bermuda
$
(419,890
)
 
$
447,257

 
$
470,454

Foreign
 
 
 
 
 
U.K.
11,368

 
4,308

 
13,621

U.S.
(61,914
)
 
4,038

 
(4,176
)
Switzerland
8,989

 
(1,084
)
 
2,276

Canada
1,251

 
2,599

 
493

Other
30,785

 
33,736

 
(2,074
)
Total (loss) income before income taxes
$
(429,411
)
 
$
490,854

 
$
480,594

Income tax (benefit) expense is composed of both current and deferred tax attributable to U.S. and Non-U.S. jurisdictions as follows:
 
Years Ended December 31,
 
2017
 
2016
 
2015
Current income tax (benefit) expense
 
 
 
 
 
U.S.
$
(629
)
 
$
2,042

 
$
739

Non-U.S.
(298
)
 
711

 
6,028

Total current income tax (benefit) expense
$
(927
)
 
$
2,753

 
$
6,767

 
 
 
 
 
 
Deferred income tax (benefit) expense
 
 
 
 
 
U.S.
$
(4,295
)
 
$
(3,487
)
 
$
1,360

Non-U.S.
(2,358
)
 
(18,995
)
 
(1,751
)
Total deferred income tax benefit
$
(6,653
)
 
$
(22,482
)
 
$
(391
)
 
 
 
 
 
 
Total income tax (benefit) expense
 
 
 
 
 
U.S.
$
(4,924
)
 
$
(1,445
)
 
$
2,099

Non-U.S.
(2,656
)
 
(18,284
)
 
4,277

Total income tax (benefit) expense
$
(7,580
)
 
$
(19,729
)
 
$
6,376


F-65
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



The table below is a reconciliation of the actual income tax (benefit) expense for the years ended December 31, 2017, 2016 and 2015 to the amount computed by applying the effective tax rate of 0% under Bermuda law to income before taxes:
 
Years Ended December 31,
 
2017
 
2016
 
2015
Expected tax expense at Bermuda statutory rate of 0%
$
—

 
$
—

 
$
—

Foreign tax rate differential
(9,795
)
 
11,394

 
6,462

Changes in valuation allowance
(7,997
)
 
(36,990
)
 
9,830

Tax exempt income and expenses not deductible
(1,034
)
 
(757
)
 
1,299

Impact of enacted changes in tax rates
13,008

 
8,931

 
69

Prior years tax adjustments
(1,892
)
 
(5,199
)
 
(12,272
)
Other
130

 
2,892

 
988

Actual income tax (benefit) expense
$
(7,580
)
 
$
(19,729
)
 
$
6,376

Deferred tax assets and liabilities primarily represent the tax effect of temporary differences between the carrying value of assets and liabilities for financial statement purposes and such values as measured by tax laws and regulations in countries in which the operations are taxable. Deferred tax assets may also represent the tax effect of tax losses carried forward.
In assessing whether a deferred tax asset can be recovered and assessing the need for a valuation allowance, the Company considers all positive and negative evidence to determine whether it is more likely than not that the tax benefit of part or all of a deferred tax asset will be realized. The Company’s framework for assessing the recoverability of deferred tax assets primarily considers taxable income in prior carryback years when permitted by law, future reversal of existing taxable temporary differences, available tax planning strategies and the expected occurrence of future taxable income. The weighting of the positive and negative evidence is commensurate with the extent to which they can be objectively verified.


F-66
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



Significant components of the Company’s deferred tax assets and liabilities as at December 31, 2017 and 2016 were as follows:
 
December 31, 2017
 
December 31, 2016
Deferred income tax assets related to:
 
 
 
Tax losses carried forward
$
115,579

 
$
116,416

Deferred compensation
4,924

 
6,915

Deferred interest expense
1,226

 
2,039

Tax credits carried forward
5,755

 
5,469

Discounting of loss reserves
5,137

 
9,938

Unearned premiums reserve
8,622

 
6,647

Pension
2,511

 
5,943

Lloyd’s underwriting loss deductible in future periods
—

 
581

Other
6,463

 
4,943

Total gross deferred income tax assets
150,217

 
158,891

Less: Valuation allowances
(86,272
)
 
(98,065
)
Total net deferred income tax assets
$
63,945

 
$
60,826

 
 
 
 
Deferred income tax liabilities related to:
 
 
 
Deferred acquisition costs
5,962

 
4,633

Intangibles
4,230

 
7,583

Unrealized appreciation on investments
1,477

 
3,179

Properties and fixed assets
2,387

 
2,593

Other
2,022

 
2,640

Total deferred income tax liabilities
16,078

 
20,628

Net deferred tax asset
$
47,867

 
$
40,198

As part of the 2017 Tax Act, the U.S. statutory rate was reduced from 35% to 21%. Accordingly, the Company has re-measured U.S. deferred tax assets and liabilities based on the rate they are expected to reverse at in the future. As a result of the re-measurement, the Company’s U.S. net deferred tax asset was reduced in 2017 by $12,934.
Additionally, the 2017 Tax Act prescribed a new method of discounting loss reserves for U.S. tax purposes which requires companies to calculate a revised tax loss reserve adjustment for periods prior to 2018 and then recognize this change in taxable income ratably over an eight year period. This would result in an increase to the deferred tax asset related to loss reserves and an equal increase to the deferred tax liability for the future taxable income, resulting in no impact to the net deferred tax asset as reported above. The new methodology will calculate the discount using a different index for the calculation than it had in the past. Specifically, it will use a lagging 60 month average of the “High Quality Corporate Bond Yield Curve.” The legislation did not specify however, the maturity segment to use, and left the development of the precise methodology and calculation of the factors to the regulatory process. The U.S. Treasury is expected to publish the discount rates for the new method in time for the filing due date of the 2017 tax return on October 15, 2018. Since the U.S. Treasury has not yet published the rates and any estimation of them could result in a materially different adjustment than what the ultimate adjustment will be, the Company has chosen to not include a provisional amount for the deferred tax asset and liability in regards to the change in discounting methodology because the Company does not believe we have adequate information to provide a reasonable estimate. The Company will update its disclosure once the necessary information is available.

F-67
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



The movement in the deferred tax asset on tax losses carried forward and related valuation allowance from December 31, 2016 to December 31, 2017 can be explained as follows:
 
 
Deferred Tax Asset on Tax Losses Carried Forward
 
Valuation Allowance
Balance, beginning of year
 
$
116,416

 
$
(98,065
)
Movement due to creation of tax losses carried forward
 
14,327

 
(2,242
)
Movement due to use of tax losses carried forward
 
(8,765
)
 
2,456

Movement due to provision to return adjustments
 
1,521

 
(1,521
)
Movement due to changes in enacted tax rates
 
(7,319
)
 
3,195

Movement due to change in assessment of deferred tax asset recoverability
 
—

 
9,304

Forfeiture of tax losses carried forward
 
(2,576
)
 
2,576

Foreign exchange
 
1,975

 
(1,975
)
Balance, end of year
 
$
115,579

 
$
(86,272
)
The above movement of $14,327 represents the tax benefit on current year tax losses that can be carried forward in the U.K. ($1,837) and the U.S. ($12,490). The related change in valuation allowance of $2,242 reflects the tax expense for certain U.S. tax losses carried forward where a valuation allowance was provided. The movement of $8,765 reflects the impact from the use of tax losses carried forward in Luxembourg ($6,309), Switzerland ($1,888) and Singapore ($568). The related movement in valuation allowance of $2,456 represents the tax benefit from the use of tax losses carried forward where a full valuation allowance was previously provided (Switzerland: $1,888 and Singapore: $568). The movement of $1,521 represents prior year adjustments reflecting tax losses carried forward as per tax returns filed. The change in deferred tax asset of $7,319 and related valuation allowance of $3,195 reflects the impact of enacted changes in income tax rate, primarily in the U.S. The movement in valuation allowance of $9,304 is due to the partial release of valuation allowances which had previously been applied against deferred tax assets related to carried forward Swiss and Luxembourg tax losses acquired as part of the Flagstone acquisition.
As at December 31, 2017, the Company believes, after review of all available positive and negative evidence that it is more likely than not to have sufficient future taxable income to realize a portion of these deferred tax assets. As such, the Company has recorded a partial release from the previously held valuation allowance resulting in a current year tax benefit. The tax effect from forfeiture of tax losses carried forward of $2,576 results from the net reduction of Swiss tax losses association with the application of non-taxable income of Validus Re Swiss’ Bermuda Branch in accordance with Swiss law. The movement of $1,975 represents the foreign exchange effect on the deferred tax asset and related valuation allowance for tax losses carried forward in local currency in Switzerland.
As at December 31, 2017, the Company had net operating and capital losses carried forward, inclusive of cumulative currency translation adjustments, as follows:
 
 
Luxembourg
 
Switzerland
 
United States
 
United Kingdom
 
Singapore
 
Total
2018-2020
 
$
—

 
$
145,669

 
$
—

 
$
—

 
$
—

 
$
145,669

2029-2038
 
—

 
—

 
22,827

 
—

 
—

 
22,827

No expiration date
 
276,819

 
—

 
29,281

 
9,543

 
2,323

 
317,966

Total
 
276,819

 
145,669

 
52,108

 
9,543

 
2,323

 
486,462

 
 
 
 
 
 
 
 
 
 
 
 
 
Gross deferred tax asset
 
72,001

 
30,590

 
10,943

 
1,813

 
232

 
115,579

Valuation allowance
 
(53,899
)
 
(27,347
)
 
(4,794
)
 
—

 
(232
)
 
(86,272
)
Net deferred tax asset
 
$
18,102

 
$
3,243

 
$
6,149

 
$
1,813

 
$
—

 
$
29,307

Prior to the enactment of the 2017 Tax Act, the U.S. allowed for net operating losses to be carried back two years and forward 20 years. For years beginning after December 31, 2017, net operating losses on non-insurance companies in the U.S. may no longer

F-68
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



be carried back but will be allowed to be carried forward indefinitely. The 2017 Tax Act did not change the treatment of net operating losses for insurance companies. The new legislation does not provide for how to apply these rules where a company files a consolidated tax return which includes both insurance and non-insurance companies. As such, the $22,827 figure above relates to U.S. net operating losses of Validus Re Switzerland which is taxed as an insurance company. The $29,281 figure relates to net operating losses of the Validus U.S. consolidated group of which $7,768 relates to insurance companies within the consolidated group. The Company believes these will have no expiration date when the legislative guidance becomes available.
As of December 31, 2017, there are U.S. alternative minimum tax credit carryforwards of $5,755 which do not expire.
The valuation allowance as at December 31, 2017 of $86,272 (2016: $98,065) relates to tax losses carried forward in Luxembourg, Switzerland, Singapore and the U.S. The Company believes it is necessary to maintain a full valuation allowance against the deferred tax assets related to tax losses carried forward in Singapore and the U.S., outside the U.S. consolidated group, after review of all available positive and negative evidence, including uncertainty regarding the ability of the concerned operations to generate future taxable income to utilize the losses carried forward and realize the deferred tax assets. The weighting of the positive and negative evidence is commensurate with the extent to which they can be objectively verified.
As mentioned above, partial releases of $9,304 (Luxembourg: $6,061 and Switzerland: $3,243) of the valuation allowance previously held against a deferred tax asset related to tax losses carried forward was recorded as of December 31, 2017. The Company believes, after review of all positive and negative evidence, it is now more likely than not to have sufficient future taxable income to realize a portion of these deferred tax assets.
The U.S. consolidated group generated tax losses of $29,281 in 2017. As discussed above, absent further legislative guidance, the Company has attributed all of these losses to the non-insurance company members of the group. Accordingly, these losses will be carried forward indefinitely. As of December 31, 2017, the Company believes it is more likely than not that the U.S. consolidated group will have sufficient future taxable income to utilize these losses within a reasonable period of time.
The Company will continue to monitor all available positive and negative evidence, including its expectations for future taxable income in the relevant jurisdictions, in relation to the recoverability of its existing deferred tax balances. If the Company’s positive evidence continues to develop favorably in the foreseeable future, it is possible that further releases of the valuation allowances related to deferred tax asset balances will occur.
Recognition of the benefit of a given tax position is based upon whether a company determines that it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. In evaluating the more-likely-than-not recognition threshold, the Company must presume the tax position will be subject to examination by a tax authority with full knowledge of all relevant information. If the recognition threshold is met, then the tax position is measured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement. As at December 31, 2017 and 2016, the Company had no accrued liabilities for tax, interest and penalties relating to uncertain tax positions. Interest and penalties related to uncertain tax positions would be recognized in income tax expense.
The Company has undistributed earnings in several foreign subsidiaries. If such earnings were to be distributed, as dividends or otherwise, they may be subject to income and withholding taxes. As a general rule, the Company intends to only distribute earnings that can be distributed in a tax free manner with the exception of a few smaller subsidiaries where the Company has accrued a withholding tax for such future distributions. In the United States, the Company intends to indefinitely reinvest any earnings such that no accrual of potential withholding tax was made. Were the Company to change its assertion that it would not indefinitely reinvest earnings in its U.S. subsidiaries, the Company estimates it would need to accrue $878 of withholding tax payable on future distributions.
The Company has open examinations by tax authorities in the U.S. (2013-2016) and Switzerland (2014-2015). The Company believes that these examinations will be concluded within the next 12 months and currently does not expect any material adjustments as a result of these audits.
The Company has open tax years that are potentially subject to examination by local tax authorities in the following major tax jurisdictions: the U.K. (2016-2017), the U.S. (2016-2017), Switzerland (2013-2017) and Canada (2014-2017).

F-69
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



21. Accumulated other comprehensive (loss) income
The changes in accumulated other comprehensive (loss) income, by component for the years ended December 31, 2017, 2016 and 2015 are as follows:
 
Year Ended December 31, 2017
 
Foreign currency translation adjustment
 
Minimum pension liability
 
Cash flow hedge
 
Total
Balance, net of tax, beginning of year
$
(22,274
)
 
$
(150
)
 
$
(792
)
 
$
(23,216
)
Other comprehensive income (loss), net of tax
4,057

 
2,869

 
(6,352
)
 
574

Amounts reclassified from accumulated other comprehensive loss
—

 
—

 
450

 
450

Balance, net of tax, end of year
$
(18,217
)
 
$
2,719

 
$
(6,694
)
 
$
(22,192
)
 
 
 
 
 
 
 
 
 
Year Ended December 31, 2016
 
Foreign currency translation adjustment
 
Minimum pension liability
 
Cash flow hedge
 
Total
Balance, net of tax, beginning of year
$
(11,834
)
 
$
334

 
$
(1,069
)
 
$
(12,569
)
Other comprehensive (loss) income, net of tax
(10,440
)
 
(484
)
 
277

 
(10,647
)
Balance, net of tax, end of year
$
(22,274
)
 
$
(150
)
 
$
(792
)
 
$
(23,216
)
 
 
 
 
 
 
 
 
 
Year Ended December 31, 2015
 
Foreign currency translation adjustment
 
Minimum pension liability
 
Cash flow hedge
 
Total
Balance, net of tax, beginning of year
$
(8,118
)
 
$
(210
)
 
$
(228
)
 
$
(8,556
)
Other comprehensive (loss) income, net of tax
(3,716
)
 
544

 
(841
)
 
(4,013
)
Balance, net of tax, end of year
$
(11,834
)
 
$
334

 
$
(1,069
)
 
$
(12,569
)

F-70
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



22. Commitments and contingencies
(a)
Concentrations of credit risk
The Company underwrites a significant amount of its reinsurance business through three brokers as set out below. There is credit risk associated with payments of (re)insurance balances to the Company in regards to these brokers’ ability to fulfill their contractual obligations. These brokerage companies are large and well established, and there are no indications they are financially distressed. There was no other broker or (re)insured party that accounted for more than 10% of gross premiums written for the periods mentioned.
The following table shows the percentage of Validus’ gross premiums written through each of these three brokers for the years ended December 31, 2017, 2016 and 2015:
 
Years Ended December 31,
 
2017
 
2016
 
2015
Marsh & McLennan Companies, Inc.
24.6
%
 
28.8
%
 
28.2
%
Aon Benfield Group Ltd.
16.3
%
 
16.2
%
 
15.5
%
Willis Towers Watson plc
12.1
%
 
14.1
%
 
14.3
%
(b)
Employment agreements
The Company has entered into employment agreements with certain individuals that provide for executive benefits and severance payments under certain circumstances.
(c)
Operating leases
The Company leases office space and office equipment under operating leases. Total rent expense with respect to these operating leases for the year ended December 31, 2017 was approximately $11,833 (2016: $9,761, 2015: $10,143). Future minimum lease commitments are as follows:
 
December 31, 2017
2018
$
13,610

2019
13,212

2020
12,193

2021
10,942

2022
7,671

2023 and thereafter
39,940

Total
$
97,568

(d)
Funds at Lloyd’s
The Company operates in Lloyd’s through a corporate member, Talbot 2002 Underwriting Capital Ltd (“T02”), which is the sole participant in the Talbot Syndicate. Lloyd’s sets T02’s Economic Capital Assessment (“ECA”) annually based on the Talbot Syndicate’s business plan, rating environment and reserving environment together with input arising from Lloyd’s discussions with regulatory and rating agencies, and other parties. This ECA is satisfied by syndicate net assets determined on a basis consistent with Solvency II, an EU directive covering capital adequacy, risk management and regulatory reporting for insurers. Any syndicate net liabilities on a Solvency II basis are required to be funded in addition to the ECA. Such additional funds, known as Funds at Lloyd’s (“FAL”), comprises cash and investments. The Company provided FAL in the amount of $661,600 during the fourth quarter of 2017 (2016: $583,600).
The amounts which are provided as FAL are not available for distribution to the Company for the payment of dividends. T02 may also be required to maintain funds under the control of Lloyd’s in excess of its capital requirement and such funds also may not be available for distribution to the Company for the payment of dividends.

F-71
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



(e)
Lloyd’s Central Fund
Whenever a member of Lloyd’s is unable to pay its debts to policyholders, such debts may be payable by the Lloyd’s Central Fund. If Lloyd’s determines that the Central Fund needs to be increased, it has the power to assess premium levies on current Lloyd’s members up to 3% of a member’s underwriting capacity in any one year. The Company does not believe that any assessment is likely in the foreseeable future and has not provided any allowance for such an assessment. However, based on the Company’s 2018 estimated premium income at Lloyd’s of £650,000, at December 31, 2017 using an exchange rate of £1 equals $1.35 and assuming the maximum 3% assessment, the Company would be assessed approximately $26,325 (December 31, 2016: $22,140).
(f)
Investment affiliate commitments
As discussed in Note 7(c), “Investments in investment affiliates,” the Company has entered into agreements with the Aquiline II General Partner, the Aquiline III General Partner, the Aquiline Tech General Partner and the Aquiline Armour General Partner, pursuant to which it assumed total capital commitments at December 31, 2017 of $60,000, $100,000, $20,000 and $40,340, respectively. The Company’s remaining capital commitments relating to these agreements at December 31, 2017 was $3,229, $66,285, $16,142 and $40,340, respectively (December 31, 2016: $2,040, $62,031, $nil and $nil, respectively).
(g)
Fixed maturity commitments
At December 31, 2017, the Company had an outstanding commitment to participate in certain secured loan facilities through participation agreements with an established loan originator. The undrawn amount under the revolver facility participations as at December 31, 2017 was $22,082 (December 31, 2016: $28,499).
(h)
Other investment commitments
At December 31, 2017, the Company had capital commitments in certain other investments of $268,000 (December 31, 2016: $308,000). The Company’s remaining unfunded capital commitment to these investments at December 31, 2017 was $86,697 (December 31, 2016: $156,134).
(i)
Structured settlements
As at December 31, 2017, the Company is contingently liable for the present value of amounts not yet due under annuities where the claimant is the payee for the amount of $3,203 (December 31, 2016: $3,186).

F-72
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



23. Related party transactions
The transactions listed below are classified as related party transactions as principals and/or directors of each counterparty are members of the Company’s board of directors.
(a)
Aquiline Capital Partners LLC (“Aquiline Capital”)
Group Ark Insurance
Christopher E. Watson, a director of the Company and senior principal of Aquiline Capital, serves as a director of Group Ark Insurance Holdings Ltd. (“Group Ark”). Prior to August, 2016, Aquiline Capital was also a shareholder of Group Ark.
Pursuant to reinsurance agreements with a subsidiary of Group Ark, the Company recognized gross premiums written during the year ended December 31, 2016 of $3,157 (2015: $2,718) with $292 included in premiums receivable at December 31, 2016. The Company also recognized reinsurance premiums ceded during the year ended December 31, 2016 of $40 (2015: $24). The Company recorded $798 of loss reserves recoverable at December 31, 2016 and earned premium adjustments of $3,115 during the year ended December 31, 2016 (2015: $2,833).
Wellington
Aquiline Capital are shareholders of Wellington Insurance Company (“Wellington”) and Christopher E. Watson serves as a director of Wellington.
Pursuant to reinsurance agreements with a subsidiary of Wellington, the Company recognized gross premiums written during the year ended December 31, 2017 of $4,196 (2016: $2,860 and 2015: $nil) with $211 included in premiums receivable at December 31, 2017 (December 31, 2016: $666). The Company also recognized earned premium adjustments during the year ended December 31, 2017 of $4,377 (2016: $2,603 and 2015: $nil).
Aquiline II, Aquiline III, Aquiline Tech and Aquiline Armour
Jeffrey W. Greenberg and Christopher E. Watson, directors of the Company, serve as managing principal and senior principal, respectively, of Aquiline Capital. Additional information related to the Company’s investments in Aquiline II, III, Tech and Armour is disclosed in Note 7(c), “Investments in Investment Affiliates.”
The Company had, as of December 31, 2017 and December 31, 2016, investments in Aquiline II, III, Tech and Armour with a total value of $100,137 and $100,431 and outstanding unfunded commitments of $125,996 and $64,071, respectively. For the year ended December 31, 2017, the Company incurred $2,863 (2016: $2,874 and 2015: $3,333) in partnership fees associated with these investments.
(b)    Other
Certain shareholders of the Company and their affiliates, as well as employees of entities associated with directors and officers may have purchased insurance and/or reinsurance from the Company in the ordinary course of business. The Company does not believe these transactions to be material.

F-73
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



24. Earnings per common share
The following table sets forth the computation of basic (loss) earnings per common share and (loss) earnings per diluted common share available to Validus common shareholders for the years ended December 31, 2017, 2016 and 2015:
 
Years Ended December 31,
 
2017
 
2016
 
2015
Basic (loss) earnings per common share
 
 
 
 
 
Net (loss) income (attributable) available to Validus common shareholders
$
(63,483
)
 
$
359,384

 
$
374,893

Less: Dividends on outstanding warrants
—

 
—

 
(3,566
)
Net (loss) income allocated to Validus common shareholders
(63,483
)
 
359,384

 
371,327

Weighted average number of common shares outstanding
79,091,376

 
81,041,974

 
83,107,236

Basic (loss) earnings per share (attributable) available to Validus common shareholders
$
(0.80
)
 
$
4.43

 
$
4.47

 
 
 
 
 
 
(Loss) earnings per diluted common share
 
 
 
 
 
Net (loss) income (attributable) available to Validus common shareholders
$
(63,483
)
 
$
359,384

 
$
374,893

 
 
 
 
 
 
Weighted average number of common shares outstanding
79,091,376

 
81,041,974

 
83,107,236

Share equivalents:
 
 
 
 
 
Warrants
—

 
—

 
2,090,248

Stock options
—

 
28,196

 
151,867

Unvested restricted shares
—

 
1,289,290

 
1,077,409

Weighted average number of diluted common shares outstanding
79,091,376

 
82,359,460

 
86,426,760

(Loss) earnings per diluted common share (attributable) available to Validus common shareholders
$
(0.80
)
 
$
4.36

 
$
4.34

Earnings per diluted common share assumes the exercise of all dilutive stock options and restricted stock grants. Due to the net loss incurred during the year ended December 31, 2017, share equivalents were not included in the computation of loss per diluted share due to their anti-dilutive effect. Share equivalents that would result in the issuance of 133,810 and 167,417 common shares were outstanding for the years ended December 31, 2016 and 2015, respectively, but were not included in the computation of earnings per diluted share because the effect would be anti-dilutive.

F-74
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



25. Segment information
The Company conducts its operations worldwide through three reportable segments, which have been determined under ASC Topic 280 “Segment Reporting” to be Reinsurance, Insurance and Asset Management. The Company’s reportable segments are strategic business units that offer different products and services. They are managed and have capital allocated separately because each segment undertakes different strategies.
A description of each of the Company’s reportable segments and its Corporate and Investments function is as follows:
Reinsurance Segment
The Reinsurance segment operates globally and is primarily focused on treaty reinsurance within the following lines and classes of business:
•
Property: catastrophe excess of loss, per risk excess of loss, proportional and treaty;
•
Specialty - Short-tail: aerospace and aviation, agriculture, composite, marine, other specialty (including contingency, crisis management and life and accident & health), technical lines, terrorism, trade credit and workers’ compensation; and
•
Specialty - Other: casualty and financial lines of business.
Insurance Segment
The Insurance segment operates globally and focuses on specialty insurance within both the Lloyd’s and the U.S. commercial insurance markets and is focused on a wide range of insurance products within the following lines and classes of business:
•
Property: direct property and downstream energy and power;
•
Specialty - Short-tail: accident & health, agriculture, aviation, contingency, marine, and political lines (including war and political violence); and
•
Specialty - Other: financial lines of business, liability (including general liability, professional liability, products liability and miscellaneous malpractice), marine and energy, political risk and products and airports.
Asset Management Segment
The Asset Management segment leverages the Company’s underwriting and analytical expertise and earns management and performance fees from the Company and other third party investors primarily through the management of ILS funds and sidecars.
Corporate and Investments
The Company’s Corporate and Investments function, which includes the activities of the parent company, carries out certain functions for the group, including investment management. Corporate and Investments includes investment income on a managed basis and other non-segment expenses, predominantly general and administrative, stock compensation, finance and transaction expenses. Transaction expenses are primarily comprised of legal, financial advisory and audit related services incurred in connection with the acquisition of CRS. Corporate and Investments also includes the activities of certain key executives such as the Chief Executive Officer and Chief Financial Officer. For reporting purposes, Corporate and Investments is reflected separately; however, it is not considered a reportable segment under these circumstances. Other reconciling items include, but are not limited to, the elimination of certain inter segment revenues and expenses and other items that are not allocated to the reportable segments.



F-75
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



The following tables summarize the results of our reportable segments and “Corporate and Investments” function:
 
 
Years Ended December 31,
Reinsurance Segment Information
 
2017
 
2016
 
2015
Underwriting revenues
 
 
 
 
 
 
Gross premiums written
 
$
1,195,207

 
$
1,184,912

 
$
1,194,589

Reinsurance premiums ceded
 
(209,289
)
 
(121,331
)
 
(158,433
)
Net premiums written
 
985,918

 
1,063,581

 
1,036,156

Change in unearned premiums
 
37,086

 
(67,432
)
 
11,827

Net premiums earned
 
1,023,004

 
996,149

 
1,047,983

Other insurance related income
 
67

 
25

 
2,214

Total underwriting revenues
 
1,023,071

 
996,174

 
1,050,197

Underwriting deductions
 
 
 
 
 
 
Losses and loss expenses
 
692,719

 
415,505

 
467,788

Policy acquisition costs
 
199,430

 
189,797

 
173,574

General and administrative expenses
 
80,177

 
85,000

 
94,531

Share compensation expenses
 
10,762

 
11,668

 
11,137

Total underwriting deductions
 
983,088

 
701,970

 
747,030

Underwriting income
 
$
39,983

 
$
294,204

 
$
303,167

 
 
 
 
 
 
 
Selected ratios:
 
 
 
 
 
 
Ratio of net to gross premiums written
 
82.5
%
 
89.8
%
 
86.7
%
 
 
 
 
 
 
 
Losses and loss expense ratio
 
67.7
%
 
41.7
%
 
44.6
%
 
 
 
 
 
 
 
Policy acquisition cost ratio
 
19.5
%
 
19.1
%
 
16.6
%
General and administrative expense ratio
 
8.9
%
 
9.7
%
 
10.1
%
Expense ratio
 
28.4
%
 
28.8
%
 
26.7
%
Combined ratio
 
96.1
%
 
70.5
%
 
71.3
%

F-76
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



 
 
Years Ended December 31,
Insurance Segment Information
 
2017
 
2016
 
2015
Underwriting revenues
 
 
 
 
 
 
Gross premiums written
 
$
1,453,133

 
$
1,194,137

 
$
1,191,199

Reinsurance premiums ceded
 
(261,055
)
 
(162,669
)
 
(170,118
)
Net premiums written
 
1,192,078

 
1,031,468

 
1,021,081

Change in unearned premiums
 
64,007

 
(28,524
)
 
17,890

Net premiums earned
 
1,256,085

 
1,002,944

 
1,038,971

Other insurance related income
 
7,035

 
1,367

 
1,894

Total underwriting revenues
 
1,263,120

 
1,004,311

 
1,040,865

Underwriting deductions
 
 
 
 
 
 
Losses and loss expenses
 
934,199

 
604,741

 
509,388

Policy acquisition costs
 
241,186

 
232,780

 
220,157

General and administrative expenses
 
207,186

 
165,529

 
177,918

Share compensation expenses
 
12,774

 
14,987

 
13,669

Total underwriting deductions
 
1,395,345

 
1,018,037

 
921,132

Underwriting (loss) income
 
$
(132,225
)
 
$
(13,726
)
 
$
119,733

 
 
 
 
 
 
 
Selected ratios:
 
 
 
 
 
 
Ratio of net to gross premiums written
 
82.0
%
 
86.4
%
 
85.7
%
 
 
 
 
 
 
 
Losses and loss expense ratio
 
74.4
%
 
60.3
%
 
49.0
%
 
 
 
 
 
 
 
Policy acquisition cost ratio
 
19.2
%
 
23.2
%
 
21.2
%
General and administrative expense ratio
 
17.5
%
 
18.0
%
 
18.4
%
Expense ratio
 
36.7
%
 
41.2
%
 
39.6
%
Combined ratio
 
111.1
%
 
101.5
%
 
88.6
%

F-77
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



 
 
Years Ended December 31,
Asset Management Segment Information
 
2017
 
2016
 
2015
Fee revenues
 
 
 
 
 
 
Third party
 
$
20,349

 
$
18,771

 
$
19,661

Related party
 
2,150

 
3,329

 
5,309

Total fee revenues
 
22,499

 
22,100

 
24,970

Expenses
 
 
 
 
 
 
General and administrative expenses
 
12,904

 
10,233

 
12,115

Share compensation expenses
 
389

 
249

 
580

Finance expenses
 
137

 
947

 
9,312

Tax expense
 
8

 
90

 
—

Foreign exchange losses (gains)
 
7

 
19

 
(16
)
Total expenses
 
13,445

 
11,538

 
21,991

Income before investment (loss) income from funds and sidecars
 
9,054

 
10,562

 
2,979

Investment (loss) income from funds and sidecars (a)
 
 
 
 
 
 
AlphaCat Sidecars
 
79

 
607

 
5,504

AlphaCat ILS Funds - Lower Risk (b)
 
(3,102
)
 
8,901

 
7,491

AlphaCat ILS Funds - Higher Risk (b)
 
(22,662
)
 
7,471

 
8,428

BetaCat ILS Funds
 
536

 
3,623

 
1,702

PaCRe
 
—

 
(23
)
 
(3,949
)
Validus' share of investment (loss) income from funds and sidecars
 
(25,149
)
 
20,579

 
19,176

Asset Management segment (loss) income
 
$
(16,095
)
 
$
31,141

 
$
22,155

 
 
 
 
 
 
 
Gross premiums written
 
 
 
 
 
 
AlphaCat Sidecars
 
$
(181
)
 
$
(341
)
 
$
45,755

AlphaCat ILS Funds - Lower Risk (b)
 
128,295

 
112,222

 
91,363

AlphaCat ILS Funds - Higher Risk (b)
 
157,976

 
140,022

 
34,228

AlphaCat Direct (c)
 
26,729

 
18,499

 
4,780

Total
 
$
312,819

 
$
270,402

 
$
176,126

(a)
The investment income (loss) from funds and sidecars is based on equity accounting.
(b)
Lower risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of less than 7%, whereas higher risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of 7% or greater. The maximum permitted portfolio expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit.
(c)
AlphaCat Direct includes direct investments from a third party investor in AlphaCat Re.


F-78
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



 
 
Years Ended December 31,
Corporate and Investments
 
2017
 
2016
 
2015
Managed investments
 
 
 
 
 
 
Managed net investment income (a)
 
$
152,955

 
$
141,718

 
$
121,166

Net realized gains on managed investments (a)
 
7,437

 
14,680

 
1,698

Change in net unrealized gains (losses) on managed investments (a)
 
6,371

 
14,106

 
(32,007
)
Income (loss) from investment affiliates
 
22,010

 
(2,083
)
 
4,281

Total managed investment return
 
$
188,773

 
$
168,421

 
$
95,138

 
 
 
 
 
 
 
Corporate expenses
 
 
 
 
 
 
General and administrative expenses
 
$
48,598

 
$
72,249

 
$
75,724

Share compensation expenses
 
16,186

 
16,003

 
12,955

Finance expenses (a)
 
58,194

 
57,183

 
61,071

Dividends on preferred shares
 
15,861

 
4,455

 
—

Tax (benefit) expense (a)
 
(7,588
)
 
(19,819
)
 
6,376

Total Corporate expenses
 
$
131,251

 
$
130,071

 
$
156,126

 
 
 
 
 
 
 
Other items
 
 
 
 
 
 
Foreign exchange (losses) gains (a)
 
(8,544
)
 
10,778

 
(8,172
)
Other income (loss)
 
303

 
(766
)
 
(1,002
)
Transaction expenses
 
(4,427
)
 
—

 
—

Total other items
 
$
(12,668
)
 
$
10,012

 
$
(9,174
)
Total Corporate and Investments
 
$
44,854

 
$
48,362

 
$
(70,162
)
(a)
These items exclude the components which are included in the Asset Management segment income (loss) and amounts which are consolidated from VIEs.


F-79
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



The following tables reconcile the results of our reportable segments and “Corporate & Investments” function to the Consolidated results of the Company for the years indicated:
 
Year Ended December 31, 2017
 
Reinsurance Segment
 
Insurance Segment
 
Asset Management Segment and Consolidated VIEs
 
Corporate & Investments
 
Eliminations
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
1,195,207

 
$
1,453,133

 
$
312,819

 
$
—

 
$
(10,221
)
 
$
2,950,938

Reinsurance premiums ceded
(209,289
)
 
(261,055
)
 
(9,510
)
 
—

 
10,221

 
(469,633
)
Net premiums written
985,918

 
1,192,078

 
303,309

 
—

 
—

 
2,481,305

Change in unearned premiums
37,086

 
64,007

 
(1,310
)
 
—

 
—

 
99,783

Net premiums earned
1,023,004

 
1,256,085

 
301,999

 
—

 
—

 
2,581,088

Other insurance related income
67

 
7,035

 
23,896

 
—

 
(18,122
)
 
12,876

Total underwriting revenues
1,023,071

 
1,263,120

 
325,895

 
—

 
(18,122
)
 
2,593,964

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
692,719

 
934,199

 
673,260

 
—

 
—

 
2,300,178

Policy acquisition costs
199,430

 
241,186

 
30,937

 
—

 
—

 
471,553

General and administrative expenses
80,177

 
207,186

 
34,298

 
48,598

 
(18,122
)
 
352,137

Share compensation expenses
10,762

 
12,774

 
389

 
16,186

 
—

 
40,111

Total underwriting deductions
983,088

 
1,395,345

 
738,884

 
64,784

 
(18,122
)
 
3,163,979

Underwriting income (loss)
$
39,983

 
$
(132,225
)
 
$
(412,989
)
 
$
(64,784
)
 
$
—

 
$
(570,015
)
Net investment return (a)
—

 
—

 
21,948

 
188,773

 
—

 
210,721

Other items (b)
—

 
—

 
737

 
(79,135
)
 
—

 
(78,398
)
Loss attributable to AlphaCat investors
—

 
—

 
16,929

 
—

 
—

 
16,929

Net loss attributable to noncontrolling interests
—

 
—

 
357,280

 
—

 
—

 
357,280

Net income (loss) available (attributable) to Validus common shareholders
$
39,983

 
$
(132,225
)
 
$
(16,095
)
 
$
44,854

 
$
—

 
$
(63,483
)
(a)
Net investment return includes net investment income, net realized and change in net unrealized gains (losses) on investments and income (loss) from investment affiliates.
(b)
Other items includes finance expenses, transaction expenses, dividends on preferred shares, tax benefit (expense), foreign exchange gains (losses), income (loss) from operating affiliate and other income (loss).


F-80
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



 
Year Ended December 31, 2016
 
Reinsurance Segment
 
Insurance Segment
 
Asset Management Segment and Consolidated VIEs
 
Corporate & Investments
 
Eliminations
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
1,184,912

 
$
1,194,137

 
$
270,402

 
$
—

 
$
(746
)
 
$
2,648,705

Reinsurance premiums ceded
(121,331
)
 
(162,669
)
 
(6,451
)
 
—

 
746

 
(289,705
)
Net premiums written
1,063,581

 
1,031,468

 
263,951

 
—

 
—

 
2,359,000

Change in unearned premiums
(67,432
)
 
(28,524
)
 
(13,879
)
 
—

 
—

 
(109,835
)
Net premiums earned
996,149

 
1,002,944

 
250,072

 
—

 
—

 
2,249,165

Other insurance related income
25

 
1,367

 
22,386

 
—

 
(20,817
)
 
2,961

Total underwriting revenues
996,174

 
1,004,311

 
272,458

 
—

 
(20,817
)
 
2,252,126

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
415,505

 
604,741

 
44,851

 
—

 
—

 
1,065,097

Policy acquisition costs
189,797

 
232,780

 
26,905

 
—

 
—

 
449,482

General and administrative expenses
85,000

 
165,529

 
34,333

 
72,249

 
(20,817
)
 
336,294

Share compensation expenses
11,668

 
14,987

 
249

 
16,003

 
—

 
42,907

Total underwriting deductions
701,970

 
1,018,037

 
106,338

 
88,252

 
(20,817
)
 
1,893,780

Underwriting income (loss)
$
294,204

 
$
(13,726
)
 
$
166,120

 
$
(88,252
)
 
$
—

 
$
358,346

Net investment return (a)
—

 
—

 
13,106

 
168,421

 
(597
)
 
180,930

Other items (b)
—

 
—

 
(1,364
)
 
(31,807
)
 
—

 
(33,171
)
(Income) attributable to AlphaCat investors
—

 
—

 
(23,358
)
 
—

 
—

 
(23,358
)
Net (income) attributable to noncontrolling interests
—

 
—

 
(123,363
)
 
—

 
—

 
(123,363
)
Net income (loss) available (attributable) to Validus common shareholders
$
294,204

 
$
(13,726
)
 
$
31,141

 
$
48,362

 
$
(597
)
 
$
359,384

(a)
Net investment return includes net investment income, net realized and change in net unrealized gains (losses) on investments and income (loss) from investment affiliates.
(b)
Other items includes finance expenses, transaction expenses, dividends on preferred shares, tax benefit (expense), foreign exchange gains (losses), income (loss) from operating affiliate and other income (loss).


F-81
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



 
Year Ended December 31, 2015
 
Reinsurance Segment
 
Insurance Segment
 
Asset Management Segment and Consolidated VIEs
 
Corporate & Investments
 
Eliminations
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
1,194,589

 
$
1,191,199

 
$
176,126

 
$
—

 
$
(4,408
)
 
$
2,557,506

Reinsurance premiums ceded
(158,433
)
 
(170,118
)
 
(4,538
)
 
—

 
4,408

 
(328,681
)
Net premiums written
1,036,156

 
1,021,081

 
171,588

 
—

 
—

 
2,228,825

Change in unearned premiums
11,827

 
17,890

 
(11,653
)
 
—

 
—

 
18,064

Net premiums earned
1,047,983

 
1,038,971

 
159,935

 
—

 
—

 
2,246,889

Other insurance related income
2,214

 
1,894

 
25,524

 
—

 
(23,519
)
 
6,113

Total underwriting revenues
1,050,197

 
1,040,865

 
185,459

 
—

 
(23,519
)
 
2,253,002

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
467,788

 
509,388

 
657

 
—

 
—

 
977,833

Policy acquisition costs
173,574

 
220,157

 
16,327

 
—

 
—

 
410,058

General and administrative expenses
94,531

 
177,918

 
39,055

 
75,724

 
(23,519
)
 
363,709

Share compensation expenses
11,137

 
13,669

 
580

 
12,955

 
—

 
38,341

Total underwriting deductions
747,030

 
921,132

 
56,619

 
88,679

 
(23,519
)
 
1,789,941

Underwriting income
$
303,167

 
$
119,733

 
$
128,840

 
$
(88,679
)
 
$
—

 
$
463,061

Net investment return (a)
—

 
—

 
6,870

 
95,138

 
—

 
102,008

Other items (b)
—

 
—

 
(18,179
)
 
(76,621
)
 
—

 
(94,800
)
(Income) attributable to AlphaCat investors
—

 
—

 
(2,412
)
 
—

 
—

 
(2,412
)
Net (income) attributable to noncontrolling interests
—

 
—

 
(92,964
)
 
—

 
—

 
(92,964
)
Net income available to Validus common shareholders
$
303,167

 
$
119,733

 
$
22,155

 
$
(70,162
)
 
$
—

 
$
374,893

(a)
Net investment return includes net investment income, net realized and change in net unrealized gains (losses) on investments and income (loss) from investment affiliates.
(b)
Other items includes finance expenses, transaction expenses, dividends on preferred shares, tax benefit (expense), foreign exchange gains (losses), income (loss) from operating affiliate and other income (loss).
The following table sets forth the gross premiums written by line of business for the years indicated:
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
Property
 
$
1,233,021

 
$
1,128,524

 
$
1,077,700

Specialty - Short-tail
 
1,101,909

 
962,722

 
1,040,068

Specialty - Other
 
616,008

 
557,459

 
439,738

Total
 
$
2,950,938

 
$
2,648,705

 
$
2,557,506


F-82
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



The Company’s exposures are generally diversified across geographic zones. The following tables set forth the gross premiums written allocated to the territory of coverage exposure for the years indicated:
 
Gross Premiums Written
 
Year Ended December 31, 2017
 
Reinsurance Segment
 
Insurance Segment
 
Asset Management Segment
 
Eliminations
 
Total
 
%
United States
$
418,814

 
$
701,669

 
$
119,779

 
$
(10,221
)
 
$
1,230,041

 
41.7
%
 
 
 
 
 
 
 
 
 
 
 
 
Worldwide excluding United States (a)
47,467

 
148,598

 
8,467

 
—

 
204,532

 
6.9
%
Australia and New Zealand
4,072

 
12,849

 
2,003

 
—

 
18,924

 
0.6
%
Europe
39,334

 
32,047

 
630

 
—

 
72,011

 
2.4
%
Latin America and Caribbean
49,297

 
82,107

 
46

 
—

 
131,450

 
4.5
%
Japan
43,002

 
5,004

 
3,855

 
—

 
51,861

 
1.8
%
Canada
6,284

 
4,633

 
731

 
—

 
11,648

 
0.4
%
Rest of the world (b)
21,927

 
90,907

 
—

 
—

 
112,834

 
3.8
%
Sub-total, non United States
211,383

 
376,145

 
15,732

 
—

 
603,260

 
20.4
%
Worldwide including United States (a)
188,383

 
99,377

 
170,126

 
—

 
457,886

 
15.5
%
Other locations non-specific (c)
376,627

 
275,942

 
7,182

 
—

 
659,751

 
22.4
%
Total
$
1,195,207

 
$
1,453,133

 
$
312,819

 
$
(10,221
)
 
$
2,950,938

 
100.0
%

 
Gross Premiums Written
 
Year Ended December 31, 2016
 
Reinsurance Segment
 
Insurance Segment
 
Asset Management Segment
 
Eliminations
 
Total
 
%
United States
$
464,212

 
$
408,609

 
$
64,766

 
$
—

 
$
937,587

 
35.4
%
 
 
 
 
 
 
 
 
 
 
 
 
Worldwide excluding United States (a)
53,369

 
146,191

 
22,206

 
—

 
221,766

 
8.4
%
Australia and New Zealand
7,402

 
10,698

 
4,949

 
—

 
23,049

 
0.9
%
Europe
32,875

 
29,661

 
3,245

 
—

 
65,781

 
2.5
%
Latin America and Caribbean
52,080

 
88,315

 
—

 
—

 
140,395

 
5.3
%
Japan
42,045

 
4,601

 
3,221

 
—

 
49,867

 
1.9
%
Canada
4,365

 
5,671

 
207

 
—

 
10,243

 
0.4
%
Rest of the world (b)
21,142

 
106,110

 
—

 
—

 
127,252

 
4.8
%
Sub-total, non United States
213,278

 
391,247

 
33,828

 
—

 
638,353

 
24.1
%
Worldwide including United States (a)
159,313

 
95,826

 
170,253

 
(746
)
 
424,646

 
16.0
%
Other locations non-specific (c)
348,109

 
298,455

 
1,555

 
—

 
648,119

 
24.5
%
Total
$
1,184,912

 
$
1,194,137

 
$
270,402

 
$
(746
)
 
$
2,648,705

 
100.0
%

F-83
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



 
Gross Premiums Written
 
Year Ended December 31, 2015
 
Reinsurance Segment
 
Insurance Segment
 
Asset Management Segment
 
Eliminations
 
Total
 
%
United States
$
544,783

 
$
368,394

 
$
41,134

 
$
—

 
$
954,311

 
37.3
%
 
 
 
 
 
 
 
 
 
 
 
 
Worldwide excluding United States (a)
54,293

 
124,921

 
8,107

 
—

 
187,321

 
7.3
%
Australia and New Zealand
12,480

 
8,440

 
624

 
—

 
21,544

 
0.8
%
Europe
53,653

 
32,109

 
2,504

 
—

 
88,266

 
3.5
%
Latin America and Caribbean
48,923

 
85,172

 
38

 
—

 
134,133

 
5.2
%
Japan
40,467

 
3,480

 
1,671

 
—

 
45,618

 
1.8
%
Canada
3,830

 
5,734

 
458

 
—

 
10,022

 
0.4
%
Rest of the world (b)
18,351

 
102,724

 
—

 
—

 
121,075

 
4.7
%
Sub-total, non United States
231,997

 
362,580

 
13,402

 
—

 
607,979

 
23.8
%
Worldwide including United States (a)
128,211

 
98,019

 
116,523

 
(4,408
)
 
338,345

 
13.2
%
Other locations non-specific (c)
289,598

 
362,206

 
5,067

 
—

 
656,871

 
25.7
%
Total
$
1,194,589

 
$
1,191,199

 
$
176,126

 
$
(4,408
)
 
$
2,557,506

 
100.0
%
(a)
Represents risks in two or more geographic zones.
(b)
Represents risks in one geographic zone.
(c)
The other locations non-specific category refers to business for which an analysis of exposure by geographic zone is not applicable since these exposures can span multiple geographic areas and, in some instances, are not fixed locations.

F-84
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



26. Statutory and regulatory requirements
Validus Holdings, Ltd. has operations which are subject to laws and regulations in the jurisdictions in which they operate, the most significant of which are Bermuda, the United Kingdom, the United States and Switzerland.
As a holding company, Validus Holdings, Ltd.’s principal sources of income are dividends or other sources of permitted distributions from its subsidiaries. These funds provide the cash flow required for dividend payments to the Company’s shareholders. The holding company has no material restrictions on its ability to make distributions to shareholders however, the ability of our (re)insurance subsidiaries to make distributions is limited by the applicable local laws and relevant regulations of the various countries in which we operate. The Company’s subsidiaries are required to maintain certain measures of solvency and liquidity which provide restrictions on declaring dividends and distributions.
The Company’s (re)insurance subsidiaries prepare their statutory financial statements in conformity with statutory accounting practices prescribed or permitted by the applicable local laws and relevant regulatory authority. The statutory financial statements may vary materially from statements prepared in accordance with U.S. GAAP.
Statutory capital and surplus as at December 31, 2017 and 2016 and statutory net income for the years ended December 31, 2017, 2016 and 2015 for our (re)insurance subsidiaries based in our most significant regulatory jurisdictions were as follows:
 
 
Statutory Capital and Surplus
 
 
 
 
 
 
 
 
Required
 
Actual
 
Statutory Net Income (Loss)
 
 
December 31,
 
December 31,
 
Years Ended December 31,
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2015
Bermuda
 
$
677,050

 
$
1,447,138

 
$
4,203,912

 
$
4,244,211

 
$
13,449

 
$
477,624

 
$
329,260

United States
 
102,138

 
78,342

 
376,178

 
416,746

 
(7,968
)
 
7,795

 
32,255

Switzerland
 
315,000

 
267,000

 
846,152

 
700,776

 
39,570

 
30,231

 
21,379

During the year ended December 31, 2017, dividends and distributions to the Company from its subsidiaries, net of amounts reinvested in subsidiaries were $8,000 (2016: $320,000).
(a)
Bermuda
The Company has five Bermuda based insurance subsidiaries: Validus Re, a Class 4 insurer; Validus Re Swiss (Bermuda Branch), a Class 4 insurer; IPCRe Limited (“IPCRe”), a Class 3A insurer; AlphaCat Re, a Class 3 insurer; and Mont Fort Re Ltd., a Class 3 insurer. Each of these Bermuda insurance subsidiaries is registered under the Insurance Act. The Company also has two Bermuda based subsidiaries which are licensed as Special Purpose Insurers (“SPIs”) under the Insurance Act, AlphaCat Re 2011, Ltd. and AlphaCat Re 2012, Ltd.
The Company’s Bermuda based insurance subsidiaries are required to maintain minimum statutory capital and surplus equal to the greater of a minimum solvency margin (“MSM”) and the Enhanced Capital Requirement (“ECR”) where applicable. The ECR is equal to the higher of the MSM or the Bermuda Solvency Capital Requirement (“BSCR”) model or approved internal capital model. The BSCR for the relevant insurers for the year ended December 31, 2017 will not be filed with the BMA until April 2018. As a result, the required statutory capital and surplus as at December 31, 2017, of $677,050 is based on the MSM of all relevant insurers, whereas the required statutory capital and surplus as at December 31, 2016 of $1,447,138 is based primarily on the December 31, 2016 ECR, which exceeded the December 31, 2016 MSM of $732,253.
Actual statutory capital and surplus includes capital held in support of FAL which is not available for distribution to the Company. For further details refer to Note 22, “Commitments and contingencies.” At December 31, 2017 and 2016, the actual statutory capital and surplus of the Bermuda based insurance subsidiaries exceeded the relevant regulatory requirements.
The ability of certain of these insurance subsidiaries to pay dividends to the Company is limited under Bermuda law and regulations. The Insurance Act provides that each of the Class 3A and 4 Bermuda subsidiaries may not declare or pay, in any financial year, dividends of more than 25% of its total statutory capital and surplus (as shown on its statutory balance sheet in relation to the previous financial year) unless it files with the BMA at least seven days prior to the payment, an affidavit signed by at least two directors and such insurance subsidiary’s principal representative, stating that in their opinion such subsidiary will continue to satisfy the required margins following declaration of those dividends, however, there is no additional requirement for BMA approval. In addition, before reducing its total statutory capital by 15% or more (as set out in its previous year’s statutory

F-85
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



financial statements) each of the Class 3A and Class 4 Bermuda insurance subsidiaries must make application to the BMA for permission to do so; such application shall consist of an affidavit signed by at least two directors and such insurance subsidiary’s principal representative stating that in their opinion the proposed reduction in capital will not cause such subsidiaries to fail to meet its relevant margins, and such other information as the BMA may require. The Insurance Act permits each of the Class 3 insurers to declare or pay any dividends during any financial year so long as it does not cause the insurance subsidiary to fail to meet its relevant margins subject to the restrictions set out herein and other than in respect of IPCRe. Class 3 insurers, before reducing by 15% or more of its total statutory capital, as set out in its previous year’s financial statements, are required to apply to the BMA for its approval and provide such information as the BMA may require.
As at December 31, 2017, the Company’s Bermuda insurance subsidiaries have the ability to distribute up to $1,517,694 of unrestricted net assets as dividend payments or return of capital to Validus Holdings, Ltd. (December 31, 2016: $1,506,210) without prior regulatory approval.
The Company’s primary restrictions on net assets of insurance subsidiaries consist of regulatory requirements placed upon the regulated insurance subsidiaries to hold minimum amounts of total statutory capital and surplus and other than the restriction on IPCRe noted above, there were no other material restrictions on net assets in place as of December 31, 2017.
The Company’s principal operating subsidiary in Bermuda, Validus Re, maintains a branch office in Singapore. As the branch office is not considered a separate entity for regulatory purposes, the required and actual statutory capital and surplus amount includes amounts, as set out above, related to the applicable branch office. The branch office is subject to additional minimum capital or asset requirements in its country of domicile. At December 31, 2017 and 2016, the actual capital and assets for the branch exceeded the relevant local regulatory requirements.
(b)
United Kingdom - Lloyd’s
As disclosed in Note 22(d), “Commitments and contingencies,” the Talbot Syndicate and T02 are subject to regulation by the Council of Lloyd’s. The Talbot Syndicate and T02 are also subject to regulation by the U.K. Financial Conduct Authority (“FCA”) and Prudential Regulation Authority (“PRA”) under the Financial Services and Market Act 2000.
T02 is a corporate member of Lloyd’s. As a corporate member of Lloyd’s, T02 is bound by the rules of the Society of Lloyd’s, which are prescribed by Bye-laws and Requirements made by the Council of Lloyd’s under powers conferred by the Lloyd’s Act 1982. These rules (among other matters) prescribe T02’s membership subscription, the level of its contribution to the Lloyd’s central fund and the assets it must deposit with Lloyd’s in support of its underwriting, known as FAL. The Council of Lloyd’s has broad power to sanction breaches of its rules, including the power to restrict or prohibit a member’s participation on Lloyd’s syndicates. The capital required to support a Syndicate’s underwriting capacity is assessed annually and is determined by Lloyd’s in accordance with the rules of the Society of Lloyd’s. The capital requirement is satisfied by Syndicate net assets on a Solvency II basis and FAL. The FAL to support the underwriting of the Talbot Syndicate is provided by the Company’s Bermuda based insurance subsidiaries in the form of cash and investments. Amounts provided as FAL are not available for distribution to the Company for the payment of dividends.
Each year, during the second quarter, T02 applies to Lloyd’s to release accumulated funds, whether Syndicate profits, interest on FAL or other funds which are in excess of the agreed FAL amount. At December 31, 2017 and 2016, the actual capital and assets exceeded the relevant local regulatory requirements. The release for the year ended December 31, 2016 enabled a dividend payment to the Company of $7,000 during the year ended December 31, 2017 (2016: $30,000).
(c)
United States
The Company has three U.S. based insurance subsidiaries domiciled in New Hampshire: WWIC, Tudor and Stratford, which are required to file financial statements prepared in accordance with statutory accounting practices prescribed or permitted by the New Hampshire State Insurance Department (“NHSID”).
State insurance laws and regulations prescribe accounting practices for determining statutory net income and equity for insurance companies. In addition, state regulators may permit statutory accounting practices that differ from such prescribed practices. The Company’s U.S. based insurance company subsidiaries did not use such permitted practices.
The Company’s U.S. based insurance company subsidiaries are subject to certain Risk-Based Capital (“RBC”) requirements as specified by the National Association of Insurance Commissioners. Under those requirements, the minimum amount of capital

F-86
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



and surplus required to be maintained by a property/casualty insurance company is based on various risk factors. At December 31, 2017 and 2016, the Company’s U.S. based insurance company subsidiaries met the RBC requirements.
New Hampshire insurance laws limit the amount of dividends Western World may pay to the Company in a 12-month period without the approval of the NHSID. These limitations are based on the lesser of: (i) a maximum of 10.0% of prior year end statutory surplus as determined under statutory accounting practices; or (ii) statutory net income, not including realized capital gains, for the 12-month period ending December 31, next preceding, but shall not include pro rata distributions of any class of the insurer’s own securities. In determining whether a dividend or distribution is extraordinary, an insurer may carry forward net income from the previous two calendar years that has not already been paid out as dividends. This carry-forward is computed by taking the net income from the second and third preceding calendar years, not including realized capital gains, less dividends paid in the second and immediate preceding calendar years. As at December 31, 2017, the maximum dividend that may be paid to the Company by its U.S. based insurance subsidiaries without obtaining prior approval was $nil (December 31, 2016: $490). During the year ended December 31, 2017, our U.S. based insurance subsidiaries paid dividends to the Company of $15,500 (2016: $18,500).
(d)
Switzerland
Validus Re Swiss is a société anonyme headquartered in Zurich, Switzerland. The conduct of reinsurance business by a company headquartered in Switzerland requires a license granted by the Swiss Financial Market Supervisory Authority (“FINMA”). Validus Re Swiss maintains a branch office in Bermuda, Validus Reinsurance (Switzerland) Ltd. (Bermuda Branch), a Class 4 insurer.
Required statutory capital and surplus is based on the Target Capital requirements calculated under the Swiss Solvency Test (“SST”) and includes both Validus Re Swiss and its Bermuda branch. At December 31, 2017 and 2016, the actual capital and assets exceeded the relevant local regulatory requirements.
Validus Re Swiss is funded by equity in the form of paid in capital by shares and in share premium. Under Swiss corporate law as modified by insurance supervisory law, a non-life insurance company is obliged to contribute to statutory legal reserves a minimum of 20% of any annual profit up to 50% of statutory capital, being paid in share capital. Validus Re Swiss has been substantially funded by share premium. Share premium can be distributed to shareholders without being subject to withholding tax. However, the distribution of any special dividend to shareholders remains subject to the approval of FINMA which considers the maintenance of solvency and the interests of reinsureds and creditors.
Validus Reinsurance (Switzerland) Ltd. (Bermuda Branch) is exempt from filing an Annual Statutory Financial Return and Annual Capital and Solvency Return but is subject to the minimum required statutory capital and surplus requirements for Class 4 insurers and the SST. At December 31, 2017 and 2016, the branch was in compliance with all relevant regulatory requirements.

F-87
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



27. Subsequent events
(a)
Merger Agreement
On January 21, 2018, the Company entered into a definitive agreement and plan of merger (the “Merger Agreement”) with AIG. The Merger Agreement provides that, subject to the satisfaction or waiver of certain conditions set forth therein, the Company will merge with an existing AIG subsidiary in accordance with the Bermuda Companies Act (the “Merger”), with the Company surviving the Merger as a wholly–owned subsidiary of AIG (the “Surviving Company”).
Pursuant to the Merger Agreement, at the effective time of the Merger, holders of the Company’s common shares will be entitled to receive consideration of $68.00 in cash. Each of the Company’s issued and outstanding Series A and Series B Preferred Shares will remain issued and outstanding as a “Series A Preferred Share” and “Series B Preferred Share,” respectively, of the Surviving Company.
The Merger is expected to close in mid-2018, subject to the approval of the Company’s shareholders, regulatory approvals and other customary closing conditions. The Merger Agreement permits the Company to pay out regular quarterly cash dividends not to exceed $0.38 per common share, with its quarterly dividend for the second fiscal quarter for 2018 to be paid prior to the closing of the Merger even if such closing occurs prior to the regular record or payment date of such dividend.
(b)
Dividends
On February 7, 2018, the Company announced a quarterly cash dividend of $0.38 per common share, payable on March 29, 2018 to shareholders of record on March 15, 2018. The Company also announced a quarterly cash dividend of $0.3671875 and $0.3625000 per depository share on the outstanding Series A and Series B Preferred Shares, respectively. The Series A and Series B Preferred Share dividends are payable on March 15, 2018 to shareholders of record on March 1, 2018.




F-88
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



28. Unaudited quarterly financial data
 
Quarters Ended
 
December 31, 2017
 
September 30, 2017
 
June 30,
2017
 
March 31,
2017
 
Unaudited
 
Unaudited
 
Unaudited
 
Unaudited
Revenues
 
 
 
 
 
 
 
Gross premiums written
$
443,323

 
$
523,856

 
$
792,902

 
$
1,190,857

Reinsurance premiums ceded
(96,445
)
 
(116,860
)
 
(56,222
)
 
(200,106
)
Net premiums written
346,878

 
406,996

 
736,680

 
990,751

Change in unearned premiums
304,599

 
316,212

 
(105,653
)
 
(415,375
)
Net premiums earned
651,477

 
723,208

 
631,027

 
575,376

Net investment income
48,960

 
44,458

 
44,241

 
40,214

Net realized gains (losses) on investments
5,607

 
906

 
2,274

 
(1,164
)
Change in net unrealized (losses) gains on investments
(21,257
)
 
(5,197
)
 
16,321

 
13,348

Income from investment affiliates
6,345

 
1,011

 
9,466

 
5,188

Other insurance related income and other income
6,939

 
3,571

 
1,339

 
1,330

Foreign exchange (losses) gains
(283
)
 
(1,404
)
 
(7,329
)
 
1,569

Total revenues
697,788

 
766,553

 
697,339

 
635,861

Expenses
 
 
 
 
 
 
 
Losses and loss expenses
479,842

 
1,254,602

 
296,149

 
269,585

Policy acquisition costs
127,067

 
115,590

 
117,268

 
111,628

General and administrative expenses
97,522

 
70,342

 
96,349

 
87,924

Share compensation expenses
10,031

 
9,443

 
11,146

 
9,491

Finance expenses
15,871

 
14,523

 
14,209

 
13,943

Transaction expenses
—

 
—

 
4,427

 
—

Total expenses
730,333

 
1,464,500

 
539,548

 
492,571

(Loss) income before taxes and (income) loss attributable to AlphaCat investors
(32,545
)
 
(697,947
)
 
157,791

 
143,290

Tax benefit
412

 
2,632

 
987

 
3,549

(Income) loss attributable to AlphaCat investors
(37,868
)
 
74,130

 
(11,830
)
 
(7,503
)
Net (loss) income
(70,001
)
 
(621,185
)
 
146,948

 
139,336

Net loss (income) attributable to noncontrolling interests
67,136

 
376,366

 
(43,650
)
 
(42,572
)
Net (loss) income (attributable) available to Validus
(2,865
)
 
(244,819
)
 
103,298

 
96,764

Dividends on preferred shares
(5,828
)
 
(5,627
)
 
(2,203
)
 
(2,203
)
Net (loss) income (attributable) available to Validus common shareholders
$
(8,693
)
 
$
(250,446
)
 
$
101,095

 
$
94,561

 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
Basic (loss) earnings per common share available (attributable) to Validus common shareholders
$
(0.11
)
 
$
(3.17
)
 
$
1.28

 
$
1.19

(Loss) earnings per diluted common share available (attributable) to Validus common shareholders
$
(0.11
)
 
$
(3.17
)
 
$
1.25

 
$
1.17

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.38

 
$
0.38

 
$
0.38

 
$
0.38




F-89
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share information)



 
Quarters Ended
 
December 31, 2016
 
September 30, 2016
 
June 30,
2016
 
March 31,
2016
 
Unaudited
 
Unaudited
 
Unaudited
 
Unaudited
Revenues
 
 
 
 
 
 
 
Gross premiums written
$
339,454

 
$
372,418

 
$
764,042

 
$
1,172,791

Reinsurance premiums ceded
(40,635
)
 
(45,006
)
 
(36,229
)
 
(167,835
)
Net premiums written
298,819

 
327,412

 
727,813

 
1,004,956

Change in unearned premiums
241,580

 
236,363

 
(154,090
)
 
(433,688
)
Net premiums earned
540,399

 
563,775

 
573,723

 
571,268

Net investment income
38,153

 
43,514

 
39,257

 
29,461

Net realized gains (losses) on investments
9,220

 
4,397

 
2,724

 
(584
)
Change in net unrealized (losses) gains on investments
(67,460
)
 
5,459

 
31,428

 
47,444

Income (loss) from investment affiliates
2,166

 
453

 
(589
)
 
(4,113
)
Other insurance related income and other income (loss)
568

 
(610
)
 
824

 
1,413

Foreign exchange (losses) gains
(901
)
 
(766
)
 
6,286

 
6,245

Total revenues
522,145

 
616,222

 
653,653

 
651,134

Expenses
 
 
 
 
 
 
 
Losses and loss expenses
275,126

 
258,394

 
307,130

 
224,447

Policy acquisition costs
120,889

 
113,434

 
107,966

 
107,193

General and administrative expenses
77,955

 
82,443

 
89,688

 
86,208

Share compensation expenses
10,442

 
10,501

 
10,727

 
11,237

Finance expenses
14,630

 
14,521

 
14,166

 
15,203

Total expenses
499,042

 
479,293

 
529,677

 
444,288

Income before taxes, (loss) from operating affiliate and (income) attributable to AlphaCat investors
23,103

 
136,929

 
123,976

 
206,846

Tax benefit (expense)
21,147

 
(1,830
)
 
(1,706
)
 
2,118

(Loss) from operating affiliate
—

 
—

 
—

 
(23
)
(Income) attributable to AlphaCat investors
(7,080
)
 
(5,564
)
 
(6,114
)
 
(4,600
)
Net income
37,170

 
129,535

 
116,156

 
204,341

Net (income) attributable to noncontrolling interests
(27,200
)
 
(37,439
)
 
(21,193
)
 
(37,531
)
Net income available to Validus
9,970

 
92,096

 
94,963

 
166,810

Dividends on preferred shares
(2,203
)
 
(2,252
)
 
—

 
—

Net income available to Validus common shareholders
$
7,767

 
$
89,844

 
$
94,963

 
$
166,810

 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
Basic earnings per common share available to Validus common shareholders
$
0.10

 
$
1.12

 
$
1.16

 
$
2.01

Earnings per diluted common share available to Validus common shareholders
$
0.10

 
$
1.11

 
$
1.14

 
$
1.98

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.35

 
$
0.35

 
$
0.35

 
$
0.35




F-90

SCHEDULE I
VALIDUS HOLDINGS, LTD.
SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
As at December 31, 2017
(Expressed in thousands of U.S. dollars)
 
Amortized
cost
 
Fair
value
 
Amount
shown on the
Balance Sheet
U.S. government and government agency
$
733,510

 
$
727,397

 
$
727,397

Non-U.S. government and government agency
310,845

 
312,239

 
312,239

U.S. states, municipalities and political subdivisions
201,347

 
201,303

 
201,303

Agency residential mortgage-backed securities
984,387

 
978,049

 
978,049

Non-agency residential mortgage-backed securities
40,264

 
40,373

 
40,373

U.S. corporate
1,531,498

 
1,533,395

 
1,533,395

Non-U.S. corporate
420,522

 
422,249

 
422,249

Bank loans
450,320

 
442,951

 
442,951

Catastrophe bonds
231,332

 
229,694

 
229,694

Asset-backed securities
657,234

 
658,303

 
658,303

Commercial mortgage-backed securities
315,002

 
312,395

 
312,395

Total fixed maturities
5,876,261

 
5,858,348

 
5,858,348

Total short-term investments
3,381,714

 
3,381,757

 
3,381,757

Total other investments
330,416

 
355,218

 
355,218

Total
$
9,588,391

 
$
9,595,323

 
$
9,595,323


F-91

SCHEDULE II
VALIDUS HOLDINGS, LTD.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
As at December 31, 2017 and 2016
(Expressed in thousands of U.S. dollars, except share and per share information)
 
December 31, 2017
 
December 31, 2016
Assets
 
 
 
Fixed maturities trading, at fair value
$
48,901

 
$
92,197

Short-term investments trading, at fair value
978

 
—

Cash and cash equivalents
52,080

 
11,780

Investments in subsidiaries on an equity basis
4,477,046

 
4,383,800

Balances due from subsidiaries
—

 
—

Accrued investment income
119

 
239

Other assets
12,132

 
1,143

Total assets
$
4,591,256

 
$
4,489,159

Liabilities
 
 
 
Accounts payable and accrued expenses
$
41,354

 
$
26,884

Balances due to subsidiaries
59,266

 
28,622

Senior notes payable
245,564

 
245,362

Debentures payable
350,000

 
350,000

Total liabilities
$
696,184

 
$
650,868

Shareholders’ Equity
 
 
 
Authorized 571,428,571 common and preferred shares, par value $0.175 per share:
 
 
 
Preferred shares (Issued and Outstanding: 2017—16,000; 2016—6,000)
$
400,000

 
$
150,000

Common shares (Issued: 2017—161,994,491; 2016—161,279,976; Outstanding: 2017—79,319,550; 2016—79,132,252)
28,349

 
28,224

Treasury shares (2017—82,674,941; 2016—82,147,724)
(14,468
)
 
(14,376
)
Additional paid-in capital
814,641

 
821,023

Accumulated other comprehensive loss
(22,192
)
 
(23,216
)
Retained earnings
2,688,742

 
2,876,636

Total shareholders’ equity
$
3,895,072

 
$
3,838,291

Total liabilities and shareholders’ equity
$
4,591,256

 
$
4,489,159


F-92

VALIDUS HOLDINGS, LTD.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the years ended December 31, 2017, 2016 and 2015
(Expressed in thousands of U.S. dollars)
 
Years Ended December 31,
 
2017
 
2016
 
2015
Revenues
 
 
 
 
 
Net investment income
$
1,411

 
$
1,195

 
$
317

Net realized gains on investments
989

 
8,020

 
—

Change in net unrealized losses on investments
(77
)
 
(276
)
 
(395
)
Foreign exchange (losses) gains
(1,198
)
 
1,932

 
715

Total revenues
1,125

 
10,871

 
637

Expenses
 
 
 
 
 
General and administrative expenses
55,900

 
72,235

 
74,015

Share compensation expenses
6,494

 
6,832

 
7,261

Finance expenses
46,177

 
47,108

 
47,722

Total expenses
108,571

 
126,175

 
128,998

Loss before equity in net earnings of subsidiaries
(107,446
)
 
(115,304
)
 
(128,361
)
Equity in net earnings of subsidiaries
59,824

 
479,143

 
503,254

Net (loss) income (attributable) available to Validus
(47,622
)
 
363,839

 
374,893

Dividends on preferred shares
(15,861
)
 
(4,455
)
 
—

Net (loss) income (attributable) available to Validus common shareholders
$
(63,483
)
 
$
359,384

 
$
374,893

 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
Net (loss) income (attributable) available to Validus
$
(47,622
)
 
$
363,839

 
$
374,893

Other comprehensive income (loss), net of tax:
 
 
 
 
 
Change in foreign currency translation adjustments
4,057

 
(10,440
)
 
(3,716
)
Change in minimum pension liability
2,869

 
(484
)
 
544

Change in fair value of cash flow hedge
(6,352
)
 
277

 
(841
)
Other comprehensive income (loss), net of tax
574

 
(10,647
)
 
(4,013
)
Comprehensive (loss) income (attributable) available to Validus
$
(47,048
)
 
$
353,192

 
$
370,880


F-93

VALIDUS HOLDINGS, LTD.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2017, 2016 and 2015
(Expressed in thousands of U.S. dollars)
 
Years Ended December 31,
 
2017
 
2016
 
2015
Cash flows provided by (used in) operating activities
 
 
 
 
 
Net (loss) income (attributable) available to Validus
$
(47,622
)
 
$
363,839

 
$
374,893

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
 
 
Equity in net earnings of subsidiaries
(59,824
)
 
(479,143
)
 
(503,254
)
Dividends received from subsidiaries
143,000

 
30,000

 
620,700

Net realized gains on investments
(989
)
 
(8,020
)
 
—

Amortization of discount on senior notes
108

 
108

 
108

Share compensation expenses
6,494

 
6,832

 
7,261

Change in net unrealized losses on investments
77

 
276

 
395

Amortization of premium on fixed maturity investments
115

 
115

 
105

Change in:
 
 
 
 
 
Other assets
(1,003
)
 
(238
)
 
173

Accrued investment income
120

 
(190
)
 
(49
)
Balances due from subsidiaries
—

 
10,389

 
30,689

Balances due to subsidiaries
30,644

 
28,622

 
—

Accounts payable and accrued expenses
(2,754
)
 
(4,348
)
 
5,080

Net cash provided by (used in) operating activities
68,366

 
(51,758
)
 
536,101

Cash flows provided by (used in) investing activities
 
 
 
 
 
Proceeds on sale and maturity (purchases) of fixed maturity investments, net
44,092

 
(56,164
)
 
(28,903
)
Purchases of short-term investments
(978
)
 
—

 
—

Investments in subsidiaries
(250,000
)
 
—

 
(555,700
)
Return of capital from subsidiaries
115,000

 
290,000

 
400,000

Net cash (used in) provided by investing activities
(91,886
)
 
233,836

 
(184,603
)
Cash flows provided by (used in) financing activities
 
 
 
 
 
Issuance of preferred shares, net
241,686

 
144,852

 
—

(Redemption) issuance of common shares, net
(11,578
)
 
(7,701
)
 
17,407

Purchases of common shares under repurchase program
(26,568
)
 
(212,675
)
 
(260,430
)
Dividends paid on preferred shares
(15,861
)
 
(4,455
)
 
—

Dividends paid on common shares
(123,859
)
 
(115,625
)
 
(112,967
)
Net cash provided by (used in) financing activities
63,820

 
(195,604
)
 
(355,990
)
 
 
 
 
 
 
Net increase (decrease) in cash
40,300

 
(13,526
)
 
(4,492
)
Cash and cash equivalents—beginning of year
11,780

 
25,306

 
29,798

Cash and cash equivalents—end of year
$
52,080

 
$
11,780

 
$
25,306


F-94

SCHEDULE III
VALIDUS HOLDINGS, LTD.
SUPPLEMENTARY INSURANCE INFORMATION
As at and for the years ended December 31, 2017, 2016 and 2015
(Expressed in thousands of U.S. dollars)
 
As at and for the year ended December 31, 2017
 
Deferred
Acquisition
Costs
 
Reserve
for Losses
and Loss
Expenses
 
Unearned
Premiums
 
Net
Premiums
Earned
 
Net
Investment
Income
 
Losses
and Loss
Expenses
 
Amortization
of Deferred
Acquisition
Costs
 
Other
Operating
Expenses
 
Net
Premiums
Written
Reinsurance
$
83,778

 
$
1,816,654

 
$
393,289

 
$
1,023,004

 
$
—

 
$
692,719

 
$
199,430

 
$
90,939

 
$
985,918

Insurance
125,167

 
2,300,437

 
735,606

 
1,256,085

 
—

 
934,199

 
241,186

 
219,960

 
1,192,078

Asset Management
5,578

 
714,299

 
39,087

 
301,999

 
24,918

 
673,260

 
30,937

 
34,687

 
303,309

Corporate & Investments and Eliminations
(707
)
 
—

 
(20,796
)
 
—

 
152,955

 
—

 
—

 
46,662

 
—

Total
$
213,816

 
$
4,831,390

 
$
1,147,186

 
$
2,581,088

 
$
177,873

 
$
2,300,178

 
$
471,553

 
$
392,248

 
$
2,481,305

 
As at and for the year ended December 31, 2016
 
Deferred
Acquisition
Costs
 
Reserve
for Losses
and Loss
Expenses
 
Unearned
Premiums
 
Net
Premiums
Earned
 
Net
Investment
Income
 
Losses
and Loss
Expenses
 
Amortization
of Deferred
Acquisition
Costs
 
Other
Operating
Expenses
 
Net
Premiums
Written
Reinsurance
$
81,545

 
$
1,193,497

 
$
380,071

 
$
996,149

 
$
—

 
$
415,505

 
$
189,797

 
$
96,668

 
$
1,063,581

Insurance
125,239

 
1,753,164

 
669,865

 
1,002,944

 
—

 
604,741

 
232,780

 
180,516

 
1,031,468

Asset Management
4,060

 
48,534

 
38,961

 
250,072

 
9,264

 
44,851

 
26,905

 
34,582

 
263,951

Corporate & Investments and Eliminations
(1,617
)
 
—

 
(12,848
)
 
—

 
141,121

 
—

 
—

 
67,435

 
—

Total
$
209,227

 
$
2,995,195

 
$
1,076,049

 
$
2,249,165

 
$
150,385

 
$
1,065,097

 
$
449,482

 
$
379,201

 
$
2,359,000

 
As at and for the year ended December 31, 2015
 
Deferred
Acquisition
Costs
 
Reserve
for Losses
and Loss
Expenses
 
Unearned
Premiums
 
Net
Premiums
Earned
 
Net
Investment
Income
 
Losses
and Loss
Expenses
 
Amortization
of Deferred
Acquisition
Costs
 
Other
Operating
Expenses
 
Net
Premiums
Written
Reinsurance
$
61,597

 
$
1,237,245

 
$
310,588

 
$
1,047,983

 
$
—

 
$
467,788

 
$
173,574

 
$
105,668

 
$
1,036,156

Insurance
118,218

 
1,748,309

 
637,003

 
1,038,971

 
—

 
509,388

 
220,157

 
191,587

 
1,021,081

Asset Management
2,526

 
11,013

 
24,643

 
159,935

 
6,658

 
657

 
16,327

 
39,635

 
171,588

Corporate & Investments and Eliminations
(1,339
)
 
—

 
(6,024
)
 
—

 
121,166

 
—

 
—

 
65,160

 
—

Total
$
181,002

 
$
2,996,567

 
$
966,210

 
$
2,246,889

 
$
127,824

 
$
977,833

 
$
410,058

 
$
402,050

 
$
2,228,825


F-95

SCHEDULE IV
VALIDUS HOLDINGS, LTD.
REINSURANCE
For the years ended December 31, 2017, 2016 and 2015
(Expressed in thousands of U.S. dollars)
 
Direct gross
 
Ceded to
other companies
 
Assumed
from other
companies
 
Net amount
 
Percentage
of amount
assumed to net
Year Ended December 31, 2017
$
1,138,684

 
$
469,633

 
$
1,812,254

 
$
2,481,305

 
73
%
Year Ended December 31, 2016
853,885

 
289,705

 
1,794,820

 
2,359,000

 
76
%
Year Ended December 31, 2015
838,755

 
328,681

 
1,718,751

 
2,228,825

 
77
%

F-96

SCHEDULE VI
VALIDUS HOLDINGS, LTD.
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY
INSURANCE OPERATIONS
As at and for the years ended December 31, 2017, 2016 and 2015
(Expressed in thousands of U.S. dollars)
Affiliation with
registrant
 
Deferred
acquisition
costs
 
Reserves for
losses
and loss
expenses
 
Reserves for
unearned
premiums
 
Net
earned
premiums
 
Net
investment
income
 
Losses and loss
expenses
incurred related to
 
Net paid
losses
and loss
expenses
 
Amortization of
deferred
acquisition
costs
 
Net
premiums
written
Current
year
 
Prior
year
Consolidated Subsidiaries
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2017
 
$
213,816

 
$
4,831,390

 
$
1,147,186

 
$
2,581,088

 
$
177,873

 
$
2,522,711

 
$
(222,533
)
 
$
1,340,429

 
$
471,553

 
$
2,481,305

2016
 
209,227

 
2,995,195

 
1,076,049

 
2,249,165

 
150,385

 
1,281,289

 
(216,192
)
 
1,114,402

 
449,482

 
2,359,000

2015
 
181,002

 
2,996,567

 
966,210

 
2,246,889

 
127,824

 
1,283,970

 
(306,137
)
 
1,167,839

 
410,058

 
2,228,825


F-97